Is ManpowerGroup (NYSE:MAN) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ManpowerGroup Inc. (NYSE:MAN) does carry debt. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ManpowerGroup

What Is ManpowerGroup's Debt?

As you can see below, ManpowerGroup had US$989.0m of debt at March 2023, down from US$1.06b a year prior. On the flip side, it has US$706.7m in cash leading to net debt of about US$282.3m.

How Healthy Is ManpowerGroup's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ManpowerGroup had liabilities of US$4.58b due within 12 months and liabilities of US$1.80b due beyond that. On the other hand, it had cash of US$706.7m and US$4.76b worth of receivables due within a year. So it has liabilities totalling US$911.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since ManpowerGroup has a market capitalization of US$3.65b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

ManpowerGroup has a low net debt to EBITDA ratio of only 0.40. And its EBIT easily covers its interest expense, being 19.8 times the size. So we're pretty relaxed about its super-conservative use of debt. On the other hand, ManpowerGroup saw its EBIT drop by 3.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, ManpowerGroup actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

ManpowerGroup's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its EBIT growth rate. Taking all this data into account, it seems to us that ManpowerGroup takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. Given ManpowerGroup has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.