Corning (NYSE:GLW) seems to be using debt quite wisely

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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.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Corning Incorporated (NYSE: GLW) uses debt in its operations. 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.

What is Corning’s net debt?

The image below, which you can click for more details, shows Corning had $6.80 billion in debt at the end of June 2022, down from $7.38 billion year-over-year. On the other hand, it has $1.63 billion in cash, resulting in a net debt of around $5.17 billion.

NYSE: GLW Debt to Equity History September 10, 2022

How strong is Corning’s balance sheet?

The latest balance sheet data shows Corning had $5.53 billion in liabilities maturing within one year, and $12.2 billion in liabilities maturing thereafter. On the other hand, it had a cash position of 1.63 billion dollars and 1.79 billion dollars in receivables at less than one year. It therefore has liabilities totaling $14.3 billion more than its cash and short-term receivables, combined.

Corning has a very large market capitalization of $28.4 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.

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). Thus, we consider debt to earnings with and without amortization and depreciation expense.

With net debt of just 1.4 times EBITDA, Corning is arguably quite conservative. And it has interest coverage of 8.2 times, which is more than enough. The good news is that Corning increased its EBIT by 6.2% year-over-year, which should ease any worries about debt repayment. There is no doubt that we learn the most about debt from the balance sheet. But it’s future earnings, more than anything, that will determine Corning’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 forecasts.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Corning has produced strong free cash flow equivalent to 75% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Corning’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. But truth be told, we think his total passive level undermines that impression a bit. All told, it looks like Corning can comfortably manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it’s worth keeping an eye on the balance sheet. 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 found 2 warning signs for Corning which you should be aware of before investing here.

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.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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