We Think Mueller Industries (NYSE:MLI) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Mueller Industries, Inc. (NYSE:MLI) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that MLI is potentially undervalued!

How Much Debt Does Mueller Industries Carry?

As you can see below, Mueller Industries had US$2.24m of debt at June 2022, down from US$357.4m a year prior. But it also has US$202.5m in cash to offset that, meaning it has US$200.3m net cash.

How Healthy Is Mueller Industries' Balance Sheet?

The latest balance sheet data shows that Mueller Industries had liabilities of US$418.8m due within a year, and liabilities of US$82.6m falling due after that. On the other hand, it had cash of US$202.5m and US$611.6m worth of receivables due within a year. So it actually has US$312.7m more liquid assets than total liabilities.

This surplus suggests that Mueller Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 117% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Mueller Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Mueller Industries 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, Mueller Industries produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mueller Industries has US$200.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 117% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Mueller Industries that 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.