Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It’s 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, Ryder System, Inc. (NYSE: R) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Ryder System
How much debt does Ryder System have?
As you can see below, Ryder System had $ 5.94 billion in debt in September 2021, up from $ 7.39 billion the year before. However, it has $ 202.7 million in cash offsetting that, leading to net debt of around $ 5.74 billion.
A look at the responsibilities of Ryder System
We can see from the most recent balance sheet that Ryder System had liabilities of US $ 3.15 billion maturing within one year and liabilities of US $ 7.23 billion maturing beyond that. . In return, he had $ 202.7 million in cash and $ 1.36 billion in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 8.82 billion.
This deficit casts a shadow over the $ 4.26 billion company as a towering colossus of mere mortals. We therefore believe that shareholders should monitor it closely. After all, Ryder System would likely need a major recapitalization if it were to pay its creditors today.
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 earnings 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 compared to EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Ryder System has net debt worth 2.3x EBITDA, which isn’t too much, but its interest coverage seems a bit low, with EBIT at just 3.4x interest expense. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. It should be noted that Ryder System’s EBIT has skyrocketed after the rain, gaining 51% in the past twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether Ryder System can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Ryder System’s free cash flow has been 49% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
Our point of view
We would go so far as to say that Ryder System’s total liability level was disappointing. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. Once we consider all of the above factors together it looks like Ryder System’s debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for the Ryder system you should know.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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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 any stock 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 any of the stocks mentioned.
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