We Think Stanley Black & Decker (NYSE:SWK) Can Stay On Top Of Its Debt

By
Simply Wall St
Published
March 18, 2022
NYSE:SWK
Source: Shutterstock

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Stanley Black & Decker, Inc. (NYSE:SWK) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Stanley Black & Decker

How Much Debt Does Stanley Black & Decker Carry?

The image below, which you can click on for greater detail, shows that at January 2022 Stanley Black & Decker had debt of US$6.60b, up from US$4.34b in one year. However, because it has a cash reserve of US$143.5m, its net debt is less, at about US$6.45b.

debt-equity-history-analysis
NYSE:SWK Debt to Equity History March 18th 2022

How Healthy Is Stanley Black & Decker's Balance Sheet?

We can see from the most recent balance sheet that Stanley Black & Decker had liabilities of US$8.77b falling due within a year, and liabilities of US$7.82b due beyond that. Offsetting this, it had US$143.5m in cash and US$1.56b in receivables that were due within 12 months. So it has liabilities totalling US$14.9b more than its cash and near-term receivables, combined.

This is a mountain of leverage even relative to its gargantuan market capitalization of US$22.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Stanley Black & Decker's net debt to EBITDA ratio of about 2.5 suggests only moderate use of debt. And its strong interest cover of 11.5 times, makes us even more comfortable. Stanley Black & Decker grew its EBIT by 9.6% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. 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 Stanley Black & Decker 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Stanley Black & Decker recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

On our analysis Stanley Black & Decker's interest cover should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. For example, its level of total liabilities makes us a little nervous about its debt. When we consider all the factors mentioned above, we do feel a bit cautious about Stanley Black & Decker's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. Case in point: We've spotted 4 warning signs for Stanley Black & Decker you should be aware of, and 1 of them is significant.

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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