Howard Marks said 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 that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Univar Solutions Inc. (NYSE: UNVR) is in debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Univar Solutions
What is Univar Solutions’ debt?
You can click on the chart below for historical numbers, but it shows Univar Solutions had US$2.18 billion in debt in December 2021, up from US$2.59 billion a year prior. However, he has $251.5 million in cash to offset this, resulting in a net debt of approximately $1.93 billion.
How healthy is Univar Solutions’ balance sheet?
The latest balance sheet data shows that Univar Solutions had liabilities of $1.67 billion due within the year, and liabilities of $2.82 billion due thereafter. In return, he had $251.5 million in cash and $1.54 billion in receivables due within 12 months. It therefore has liabilities totaling $2.69 billion more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Univar Solutions has a market capitalization of US$5.40 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Univar Solutions’ net debt of 2.2x EBITDA suggests judicious use of debt. And the fact that its trailing twelve months EBIT was 7.1 times its interest expense aligns with that theme. Above all, Univar Solutions has increased its EBIT by 91% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Univar Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold 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, Univar Solutions’ free cash flow has been 38% of its EBIT, less than expected. It’s not great when it comes to paying off debt.
Our point of view
On the balance sheet, the most notable positive for Univar Solutions is the fact that it appears capable of growing its EBIT with confidence. But the other factors we noted above weren’t so encouraging. For example, his level of total liabilities makes us a little nervous about his debt. Given this range of data points, we believe Univar Solutions is in a good position to manage its level of leverage. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. 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. For example, we have identified 1 warning sign for Univar Solutions of which you should be aware.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient 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 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.