Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Mueller Industries, Inc. (NYSE:MLI) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Mueller Industries's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Mueller Industries had US$1.91m of debt in March 2022, down from US$392.7m, one year before. However, its balance sheet shows it holds US$139.3m in cash, so it actually has US$137.3m net cash.
How Healthy Is Mueller Industries' Balance Sheet?
The latest balance sheet data shows that Mueller Industries had liabilities of US$451.6m due within a year, and liabilities of US$88.2m falling due after that. On the other hand, it had cash of US$139.3m and US$588.4m worth of receivables due within a year. So it can boast US$187.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Mueller Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mueller Industries has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Mueller Industries grew its EBIT by 156% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mueller Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mueller Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Mueller Industries produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company's debt, in this case Mueller Industries has US$137.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 156% year-on-year EBIT growth. So is Mueller Industries's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Mueller Industries has 1 warning sign we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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