Russel Metals (TSE: RUS) could easily take on more debt
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Russel Metals Inc. (TSE: RUS) uses debt. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is the debt of Russel Metals?
You can click on the graph below for the historical figures, but it shows that Russel Metals had C $ 294.2 million in debt in June 2021, up from C $ 456.7 million a year earlier. However, given that it has a cash reserve of C $ 175.2 million, its net debt is less, at approximately C $ 119.0 million.
How strong is Russel Metals’ balance sheet?
We can see from the most recent balance sheet that Russel Metals had liabilities of C $ 538.7 million due within one year and liabilities of C $ 419.8 million due beyond. . In return, he had C $ 175.2 million in cash and C $ 539.5 million in receivables due within 12 months. It therefore has liabilities totaling C $ 243.8 million more than its combined cash and short-term receivables.
Given that Russel Metals has a market cap of C $ 2.05 billion, it’s hard to believe that these liabilities pose a big threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
With net debt of just 0.35 times EBITDA, Russel Metals is arguably pretty conservative. And this view is supported by the strong interest coverage, with EBIT reaching 9.7 times last year’s interest expense. Best of all, Russel Metals increased their EBIT by 439% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Russel Metals’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Russel Metals has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Fortunately, Russel Metals’ impressive conversion of EBIT to free cash flow means that it has the upper hand over its debt. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Given this range of factors, it seems to us that Russel Metals is being fairly conservative with its debt, and the risks appear to be well managed. The balance sheet therefore seems rather healthy to us. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for Russel Metals which you should know before investing here.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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 documents. Simply Wall St has no position in the mentioned stocks.
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