David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Pooling company (NASDAQ: POOL) uses debt. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels together.
See our latest analysis for the pool
What is pool debt?
The image below, which you can click for more details, shows that Pool had a debt of US $ 435.2 million at the end of June 2021, a reduction from US $ 453.8 million on a year. However, it has $ 63.1 million in cash offsetting that, which leads to net debt of around $ 372.1 million.
Is the pool’s balance sheet healthy?
The latest balance sheet data shows that Pool had liabilities of US $ 697.7 million due within one year, and liabilities of US $ 641.6 million due after that. In return, he had $ 63.1 million in cash and $ 585.6 million in receivables due within 12 months. Its liabilities therefore total US $ 690.6 million more than the combination of its cash and short-term receivables.
Given that Pool has a whopping market cap of US $ 17.5 billion, it’s hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to 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 costs (interest coverage). Thus, we look at debt over earnings with and without amortization charges.
Pool has a low net debt to EBITDA ratio of just 0.52. And its EBIT covers 88.9 times its interest costs. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Pool has increased its EBIT by 82% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine the Pool’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Pool has generated strong free cash flow equivalent to 69% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
The good news is that Pool’s demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Overall, we don’t think Pool is taking bad risks, as its leverage appears modest. We are therefore not worried about the use of a small leverage on the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Note that Pool is displayed 2 warning signs in our investment analysis , you must know…
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
When trading a pool or any other investment, use the platform considered by many to be the gateway for professionals to the global market, Interactive Brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account.Promoted