These 4 metrics indicate that SPX (NYSE:SPXC) is using debt reasonably well
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that SPX Company (NYSE:SPXC) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for SPX
What is SPX Net Debt?
You can click on the chart below for historical numbers, but it shows SPX had $246.0 million in debt in December 2021, up from $409.8 million a year prior. But he also has $388.2 million in cash to offset that, meaning he has a net cash of $142.2 million.
How healthy is SPX’s balance sheet?
According to the last published balance sheet, SPX had liabilities of $439.5 million due within 12 months and liabilities of $1.09 billion due beyond 12 months. In compensation for these obligations, it had cash of US$388.2 million as well as receivables valued at US$252.3 million and maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $885.2 million.
This shortfall is not that bad as SPX is worth US$2.29 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debt. Despite its notable liabilities, SPX has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!
In fact, SPX’s saving grace is its low level of leverage, as its EBIT has fallen 43% over the past twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine SPX’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. SPX may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, SPX has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While SPX’s balance sheet isn’t particularly strong, due to total liabilities, it’s clearly positive to see that it has a net cash position of $142.2 million. And it impressed us with free cash flow of $165 million, or 122% of its EBIT. So we have no problem with SPX’s use of debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. We have identified 1 warning sign with SPX, and understanding them should be part of your investment process.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.