Is Lincoln Electric Holdings (NASDAQ: LECO) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” It is 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. We can see that Lincoln Electric Holdings, Inc. (NASDAQ: LECO) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
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) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is Lincoln Electric Holdings’ net debt?
You can click on the graph below for historical figures, but it shows Lincoln Electric Holdings had $ 728.6 million in debt as of June 2021, up from $ 765.5 million a year earlier. On the other hand, it has $ 190.9 million in cash, resulting in net debt of around $ 537.7 million.
NasdaqGS: LECO History of debt to equity October 24, 2021
How strong is Lincoln Electric Holdings’ balance sheet?
We can see from the most recent balance sheet that Lincoln Electric Holdings had liabilities of US $ 696.0 million due within one year and liabilities of US $ 957.1 million due within one year. of the. On the other hand, he had $ 190.9 million in cash and $ 480.7 million in receivables due within one year. It therefore has a liability totaling US $ 981.5 million more than its cash and short-term receivables combined.
Given that the publicly traded shares of Lincoln Electric Holdings are worth a total of $ 8.58 billion, 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.
Lincoln Electric Holdings’ net debt is only 1.2 times its EBITDA. And its EBIT easily covers its interest costs, being 17.9 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. Also good is that Lincoln Electric Holdings has increased its EBIT to 13% over the past year, further increasing its ability to manage debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Lincoln Electric Holdings’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly verify whether this EBIT generates a corresponding free cash flow. Over the past three years, Lincoln Electric Holdings has recorded free cash flow of approximately 80% of its EBIT, which is higher than what we usually expected. This positions it well to repay debt if it is desirable.
Our point of view
Lincoln Electric Holdings’ interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! Zooming out, Lincoln Electric Holdings appears to be using the debt quite sensibly; and that gets the nod from us. 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. For example, we discovered 2 warning signs for Lincoln Electric Holdings which you should know before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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