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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Brands Newell Inc. (NASDAQ: NWL) is in debt. But does this debt concern shareholders?
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
How much debt do Newell brands carry?
The image below, which you can click for more details, shows Newell Brands owed US $ 5.57 billion in debt at the end of June 2021, a reduction from US $ 6.17 billion. over a year. However, he also had $ 637.0 million in cash, so his net debt is $ 4.93 billion.
NasdaqGS: History of NWL Debt to Equity October 27, 2021
A look at the responsibilities of Newell Brands
According to the latest published balance sheet, Newell Brands had liabilities of US $ 3.78 billion due within 12 months and liabilities of US $ 6.83 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 637.0 million as well as 12-month receivables valued at US $ 1.72 billion. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 8.26 billion.
This is a mountain of leverage compared to its market cap of US $ 9.49 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Newell Brands’ debt is 3.3 times its EBITDA and its EBIT covers its interest expense 4.1 times. This suggests that while debt levels are significant, we would stop calling them problematic. Looking on the bright side, Newell Brands has increased its EBIT by 55% silky over the past year. Like the milk of human kindness, this type of growth increases resilience, making the business more capable of handling debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Newell Brands’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Newell Brands has recorded free cash flow of 98% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
Newell Brands’ EBIT conversion to free cash flow was a real asset in this analysis, as was its EBIT growth rate. That said, its level of total liabilities does make us somewhat aware of potential future risks to the balance sheet. Given this range of data points, we believe Newell Brands is well positioned to manage its debt levels. But beware: we believe debt levels are high enough to warrant continued monitoring. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 1 warning sign for Newell brands that you need to be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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