These 4 metrics show ASGN (NYSE:ASGN) is using debt safely

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a 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 ASGN Incorporated (NYSE: ASGN) has debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

What is ASGN’s net debt?

As you can see below, ASGN had $1.03 billion in debt, as of June 2022, which is about the same as the previous year. You can click on the graph for more details. However, he also had $490.6 million in cash, so his net debt is $543.9 million.

NYSE: ASGN Debt to Equity August 27, 2022

How solid is ASGN’s balance sheet?

According to the last published balance sheet, ASGN had liabilities of US$492.4 million due within 12 months and liabilities of US$1.18 billion due beyond 12 months. In return, it had $490.6 million in cash and $843.2 million in receivables due within 12 months. It therefore has liabilities totaling $334.6 million more than its cash and short-term receivables, combined.

Given that ASGN has a market cap of US$5.01 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

ASGN has a low net debt to EBITDA ratio of just 1.1. And its EBIT easily covers its interest charges, being 10.6 times higher. So we’re pretty relaxed about his super-conservative use of debt. On top of that, we are happy to report that ASGN has increased its EBIT by 34%, reducing the specter of future debt repayments. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine ASGN’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, ASGN has generated free cash flow of a very strong 82% of its EBIT, more than expected. This positions him well to pay off debt if desired.

Our point of view

Fortunately, ASGN’s impressive EBIT to free cash flow conversion means it has the upper hand on its debt. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Given this set of factors, it seems to us that ASGN is quite cautious with its debt, and the risks seem well controlled. So we are not worried about using a little leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have identified 1 warning sign with ASGN and understanding them should be part of your investment process.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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