Does Watts Water Technologies (NYSE:WTS) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Watts Water Technologies, Inc. (NYSE:WTS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Watts Water Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that Watts Water Technologies had US$197.3m of debt in December 2024, down from US$298.3m, one year before. However, it does have US$389.8m in cash offsetting this, leading to net cash of US$192.5m.

A Look At Watts Water Technologies' Liabilities

We can see from the most recent balance sheet that Watts Water Technologies had liabilities of US$417.9m falling due within a year, and liabilities of US$271.2m due beyond that. Offsetting this, it had US$389.8m in cash and US$253.2m in receivables that were due within 12 months. So it has liabilities totalling US$46.1m more than its cash and near-term receivables, combined.

Having regard to Watts Water Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$6.97b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Watts Water Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Watts Water Technologies

Also good is that Watts Water Technologies grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Watts Water Technologies 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Watts Water Technologies 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, Watts Water Technologies produced sturdy free cash flow equating to 74% 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.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Watts Water Technologies has US$192.5m in net cash. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in US$326m. So is Watts Water Technologies's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Watts Water Technologies you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.