Warren Buffett said: “Volatility is far from synonymous with risk”. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We notice that Stanley Black & Decker, Inc. (NYSE: SWK) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt 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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance growth without any negative consequences. When we look at debt levels, we first look at cash and debt levels, together.
How Much is Stanley Black & Decker’s Debt?
You can click on the graph below for historical numbers, but it shows that Stanley Black & Decker had $ 4.29 billion in debt in April 2021, down from $ 6.46 billion a year earlier. However, it has US $ 949.5 million in cash, which translates into net debt of around US $ 3.34 billion.
NYSE: SWK Debt to Equity History May 21, 2021
How healthy is Stanley Black & Decker’s track record?
We can see from the most recent balance sheet that Stanley Black & Decker had liabilities of $ 4.58 billion due in one year and liabilities of $ 7.89 billion beyond. In return, it had US $ 949.5 million in cash and US $ 1.99 billion in receivables due within 12 months. Its liabilities therefore total $ 9.53 billion more than the combination of its cash and short-term receivables.
This deficit is not that big as Stanley Black & Decker is worth US $ 33.8 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that we absolutely need to take a close look at whether it can manage its debt without dilution.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) cover his interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt over EBITDA) and the actual interest charges associated with that debt (with its interest coverage ratio).
Stanley Black & Decker’s net debt is only 1.1 times its EBITDA. And its EBIT covers its interest costs 12.3 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. In addition, Stanley Black & Decker has increased its EBIT by 52% over the past twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Stanley Black & Decker can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analysts’ earnings forecasts Be interesting.
Finally, while the tax authorities love accounting profits, lenders only accept cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Stanley Black & Decker has recorded free cash flow of 65% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This hard, cold cash flow means he can reduce his debt whenever he wants.
Our point of view
Fortunately, Stanley Black & Decker’s impressive interest coverage means that it has the upper hand on its debt. And that’s just the start of the good news as its EBIT growth rate is also very encouraging. By zooming out, Stanley Black & Decker seems to be using the debt fairly sensibly; and it nods at us. While debt comes with risk, when used wisely, it can also provide a better return on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Stanley Black & Decker has 3 warning signs we think you should be aware of this.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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