These 4 measures indicate that Leggett & Platt (NYSE:LEG) is using debt reasonably well

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, Leggett & Platt, Incorporated (NYSE:LEG) is in debt. But does this debt worry shareholders?

Why is debt risky?

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. 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. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Leggett & Platt

What is Leggett & Platt’s debt?

The chart below, which you can click on for more details, shows that Leggett & Platt had $2.09 billion in debt as of June 2022; about the same as the previous year. However, he has $269.9 million in cash to offset this, resulting in a net debt of approximately $1.82 billion.

NYSE: LEG Debt to Equity History October 3, 2022

How strong is Leggett & Platt’s balance sheet?

The latest balance sheet data shows that Leggett & Platt had liabilities of $1.33 billion due within the year, and liabilities of $2.28 billion due thereafter. On the other hand, it had liquidities of 269.9 million dollars and 722.6 million dollars of accounts receivable within one year. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $2.62 billion.

While that might sound like a lot, it’s not too bad since Leggett & Platt has a market capitalization of US$4.41 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 2.4, Leggett & Platt uses debt wisely but responsibly. And the fact that its last twelve months of EBIT was 7.6 times its interest expense aligns with that theme. Notably, Leggett & Platt’s EBIT has been fairly stable over the past year. We would prefer to see some earnings growth as this always helps reduce debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Leggett & Platt 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.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Leggett & Platt has produced strong free cash flow equivalent to 76% 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

On the balance sheet, the most notable positive for Leggett & Platt is the fact that it appears to be able to convert EBIT to free cash flow with confidence. But the other factors we noted above weren’t so encouraging. For example, his level of total liabilities makes us a little nervous about his debt. When all of the items mentioned above are considered, it seems to us that Leggett & Platt is managing its debt quite well. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 2 warning signs we spotted with Leggett & Platt (including 1 that didn’t suit us too much).

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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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