DuPont de Nemours (NYSE:DD) seems to be using debt quite wisely

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.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, DuPont de Nemours, Inc. (NYSE:DD) is in debt. 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. If things go really bad, lenders can take over the business. 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. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth 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.

Our analysis indicates that DD is potentially undervalued!

What is DuPont de Nemours’ net debt?

As you can see below, at the end of June 2022, DuPont de Nemours had $11.3 billion in debt, up from $10.6 billion a year ago. Click on the image for more details. However, since he has a cash reserve of $1.44 billion, his net debt is less, at around $9.86 billion.

NYSE: DD Debt to Equity October 19, 2022

How strong is DuPont de Nemours’ balance sheet?

We can see from the most recent balance sheet that DuPont de Nemours had liabilities of $5.49 billion due in one year and liabilities of $12.8 billion beyond. On the other hand, it had liquidities of 1.44 billion dollars and 2.25 billion dollars of receivables at less than one year. Thus, its liabilities total $14.6 billion more than the combination of its cash and short-term receivables.

This deficit is not that bad because DuPont de Nemours is worth US$27.6 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.

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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

DuPont de Nemours has net debt worth 2.4x EBITDA, which isn’t too much, but its interest coverage looks a little low, with EBIT at just 5.5x operating expenses. ‘interests. While that doesn’t worry us too much, it does suggest that interest payments are a bit of a burden. Note that DuPont de Nemours’ EBIT jumped like bamboo after the rain, gaining 31% over the last twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is ultimately the company’s future profitability that will decide whether DuPont de Nemours 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. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, DuPont de Nemours’ free cash flow has been 33% of its EBIT, less than expected. It’s not great when it comes to paying off debt.

Our point of view

According to our analysis, DuPont de Nemours’ EBIT growth rate should signal that it will not have too many problems with its debt. However, our other observations were not so encouraging. For example, its EBIT to free cash flow conversion makes us a bit nervous about its debt. When we consider all the factors mentioned above, we feel a bit cautious about DuPont de Nemours’ use of debt. While we understand that debt can improve return on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 1 warning sign for DuPont de Nemours you should be aware.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Valuation is complex, but we help make it simple.

Find out if DuPont de Nemours is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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.

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