These 4 Measures Indicate That Watts Water Technologies (NYSE:WTS) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Watts Water Technologies, Inc. (NYSE:WTS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 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 Watts Water Technologies

How Much Debt Does Watts Water Technologies Carry?

The image below, which you can click on for greater detail, shows that Watts Water Technologies had debt of US$98.2m at the end of September 2023, a reduction from US$182.4m over a year. But it also has US$366.8m in cash to offset that, meaning it has US$268.6m net cash.

How Healthy Is Watts Water Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Watts Water Technologies had liabilities of US$380.3m due within 12 months and liabilities of US$185.3m due beyond that. On the other hand, it had cash of US$366.8m and US$257.6m worth of receivables due within a year. So it can boast US$58.8m more liquid assets than total liabilities.

This state of affairs indicates that Watts Water Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$6.51b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Watts Water Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Watts Water Technologies grew its EBIT by 9.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Watts Water Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Watts Water Technologies 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. Over the most recent three years, Watts Water Technologies recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Watts Water Technologies has US$268.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$312m, being 68% of its EBIT. So we don't think Watts Water Technologies's use of debt is risky. Another factor that would give us confidence in Watts Water Technologies would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.