Steelcase (NYSE:SCS) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Steelcase Inc. (NYSE:SCS) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Steelcase

What Is Steelcase's Debt?

As you can see below, Steelcase had US$482.8m of debt, at November 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$484.4m in cash, so it actually has US$1.60m net cash.

How Strong Is Steelcase's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Steelcase had liabilities of US$569.0m due within 12 months and liabilities of US$868.5m due beyond that. Offsetting these obligations, it had cash of US$484.4m as well as receivables valued at US$274.3m due within 12 months. So its liabilities total US$678.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Steelcase is worth US$1.84b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Steelcase boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Steelcase's EBIT fell a jaw-dropping 46% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Steelcase 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. Steelcase 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, Steelcase generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While Steelcase does have more liabilities than liquid assets, it also has net cash of US$1.60m. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in US$123m. So we don't have any problem with Steelcase's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Steelcase 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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