Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” 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 can see that Myer Holdings Limited (ASX:MYR) uses debt in its business. 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 pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Myer Holdings
What is Myer Holdings’ net debt?
You can click on the chart below for historical figures, but it shows Myer Holdings had A$66.8 million in debt in July 2021, up from A$78.6 million a year earlier. But on the other hand, he also has A$178.6 million in cash, resulting in a net cash position of A$111.8 million.
How healthy is Myer Holdings’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Myer Holdings had liabilities of A$590.3 million due within 12 months and liabilities of A$1.65 billion due beyond. As compensation for these obligations, it had cash of A$178.6 million and receivables valued at A$16.0 million due within 12 months. Thus, its liabilities total A$2.05 billion more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the company of 349.0 million Australian dollars, like a colossus towering over mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, Myer Holdings would likely need a major recapitalization if it were to pay its creditors today. Given that Myer Holdings has more cash than debt, we’re pretty confident that it can manage its debt, despite having a lot of debt in total.
Notably, Myer Holdings’ EBIT launched higher than Elon Musk, gaining a whopping 145% from a year ago. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Myer Holdings can strengthen its balance sheet over time. 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. Myer Holdings 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 needs and its capacity. . to manage debt. Fortunately for all shareholders, Myer Holdings has actually produced more free cash flow than EBIT for the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.
Although Myer Holdings’ balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of A$111.8 million. The icing on the cake was converting 146% of that EBIT into free cash flow, bringing in A$220 million. So we have no problem with Myer Holdings’ use of debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Be aware that Myer Holdings displays 2 warning signs in our investment analysis and 1 of them cannot be ignored…
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.