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.' 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, ManpowerGroup Inc. (NYSE:MAN) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ManpowerGroup's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 ManpowerGroup had US$1.12b of debt, an increase on US$1.07b, over one year. However, it does have US$1.57b in cash offsetting this, leading to net cash of US$443.2m.
How Strong Is ManpowerGroup's Balance Sheet?
The latest balance sheet data shows that ManpowerGroup had liabilities of US$4.68b due within a year, and liabilities of US$2.19b falling due after that. Offsetting this, it had US$1.57b in cash and US$4.91b in receivables that were due within 12 months. So its liabilities total US$396.1m more than the combination of its cash and short-term receivables.
Since publicly traded ManpowerGroup shares are worth a total of US$5.61b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ManpowerGroup boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that ManpowerGroup's load is not too heavy, because its EBIT was down 49% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 ManpowerGroup 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ManpowerGroup 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. Happily for any shareholders, ManpowerGroup actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
We could understand if investors are concerned about ManpowerGroup's liabilities, but we can be reassured by the fact it has has net cash of US$443.2m. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in US$886m. So we are not troubled with ManpowerGroup's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for ManpowerGroup you should be aware of.
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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