These 4 metrics indicate that AMETEK (NYSE: AME) is using debt reasonably well
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies AMETEK, Inc. (NYSE: AME) uses debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for AMETEK
What is AMETEK’s debt?
The graph below, which you can click for more details, shows that AMETEK had $ 2.96 billion in debt as of June 2021; about the same as the year before. On the other hand, it has $ 390.6 million in cash, resulting in net debt of around $ 2.57 billion.
A look at AMETEK’s responsibilities
According to the latest published balance sheet, AMETEK had liabilities of US $ 1.86 billion due within 12 months and liabilities of US $ 3.55 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 390.6 million as well as receivables valued at US $ 827.9 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 4.19 billion.
Considering that publicly traded AMETEK shares are worth a very impressive US $ 29.7 billion total, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
AMETEK’s net debt to EBITDA ratio of around 1.8 suggests only a moderate use of debt. And its imposing EBIT of 15.0 times its interest costs, means the debt load is as light as a peacock feather. AMETEK increased its EBIT by 8.2% last year. It’s far from incredible, but it’s a good thing when it comes to paying down debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine AMETEK’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.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, AMETEK has recorded free cash flow totaling 97% of its EBIT, which is higher than what we would normally expect. This positions it well to repay debt if it is desirable.
Our point of view
Fortunately, AMETEK’s impressive interest coverage means it has the upper hand over its debt. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! Looking at the big picture, we think AMETEK’s use of debt looks very reasonable and we don’t care. After all, reasonable leverage can increase returns on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with AMETEK, and understanding them should be part of your investment process.
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 material. Simply Wall St has no position in any of the stocks mentioned.
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