Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jones Lang LaSalle Incorporated (NYSE:JLL) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Jones Lang LaSalle’s Net Debt?
The chart below, which you can click on for greater detail, shows that Jones Lang LaSalle had US$1.66b in debt in June 2019; about the same as the year before. However, it does have US$411.2m in cash offsetting this, leading to net debt of about US$1.25b.
How Healthy Is Jones Lang LaSalle’s Balance Sheet?
We can see from the most recent balance sheet that Jones Lang LaSalle had liabilities of US$4.17b falling due within a year, and liabilities of US$2.53b due beyond that. Offsetting these obligations, it had cash of US$411.2m as well as receivables valued at US$4.29b due within 12 months. So it has liabilities totalling US$2.00b more than its cash and near-term receivables, combined.
Jones Lang LaSalle has a market capitalization of US$6.78b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Jones Lang LaSalle’s net debt is only 1.2 times its EBITDA. And its EBIT covers its interest expense a whopping 16.8 times over. So we’re pretty relaxed about its super-conservative use of debt. Also positive, Jones Lang LaSalle grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jones Lang LaSalle’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Jones Lang LaSalle’s free cash flow amounted to 47% of its EBIT, less than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.
Happily, Jones Lang LaSalle’s impressive interest cover implies it has the upper hand on its debt. And that’s just the beginning of the good news since its EBIT growth rate is also very heartening. When we consider the range of factors above, it looks like Jones Lang LaSalle is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. Over time, share prices tend to follow earnings per share, so if you’re interested in Jones Lang LaSalle, you may well want to click here to check an interactive graph of its earnings per share history.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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