We Think Watts Water Technologies (NYSE:WTS) Can Manage Its Debt With Ease

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. Importantly, Watts Water Technologies, Inc. (NYSE:WTS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Watts Water Technologies

What Is Watts Water Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Watts Water Technologies had US$98.0m of debt in June 2023, down from US$202.2m, one year before. But it also has US$295.8m in cash to offset that, meaning it has US$197.8m net cash.

How Strong 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$404.8m due within 12 months and liabilities of US$185.3m due beyond that. On the other hand, it had cash of US$295.8m and US$271.4m worth of receivables due within a year. So its liabilities total US$22.9m more than the combination of its cash and short-term receivables.

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$5.81b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Watts Water Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Watts Water Technologies grew its EBIT by 14% last year, making its debt load easier to handle. 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 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 free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Watts Water Technologies's liabilities, but we can be reassured by the fact it has has net cash of US$197.8m. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in US$253m. So is Watts Water Technologies'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. 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.