Is Emerson Electric (NYSE:EMR) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Emerson Electric Co. (NYSE:EMR) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Emerson Electric

How Much Debt Does Emerson Electric Carry?

You can click the graphic below for the historical numbers, but it shows that Emerson Electric had US$8.31b of debt in June 2023, down from US$11.6b, one year before. But it also has US$10.1b in cash to offset that, meaning it has US$1.78b net cash.

A Look At Emerson Electric's Liabilities

Zooming in on the latest balance sheet data, we can see that Emerson Electric had liabilities of US$6.61b due within 12 months and liabilities of US$11.1b due beyond that. Offsetting this, it had US$10.1b in cash and US$3.34b in receivables that were due within 12 months. So its liabilities total US$4.34b more than the combination of its cash and short-term receivables.

Given Emerson Electric has a humongous market capitalization of US$51.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Emerson Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Emerson Electric grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Emerson Electric'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Emerson Electric has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Emerson Electric produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Emerson Electric's liabilities, but we can be reassured by the fact it has has net cash of US$1.78b. And we liked the look of last year's 58% year-on-year EBIT growth. So is Emerson Electric's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Emerson Electric that you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.