Stock Analysis

These 4 Measures Indicate That Leggett & Platt (NYSE:LEG) Is Using Debt Reasonably Well

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NYSE:LEG
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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 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, Leggett & Platt, Incorporated (NYSE:LEG) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Leggett & Platt

How Much Debt Does Leggett & Platt Carry?

The chart below, which you can click on for greater detail, shows that Leggett & Platt had US$2.09b in debt in June 2022; about the same as the year before. However, it does have US$269.9m in cash offsetting this, leading to net debt of about US$1.82b.

debt-equity-history-analysis
NYSE:LEG Debt to Equity History October 3rd 2022

How Strong Is Leggett & Platt's Balance Sheet?

The latest balance sheet data shows that Leggett & Platt had liabilities of US$1.33b due within a year, and liabilities of US$2.28b falling due after that. On the other hand, it had cash of US$269.9m and US$722.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.62b.

While this might seem like a lot, it is not so bad since Leggett & Platt has a market capitalization of US$4.41b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 2.4, Leggett & Platt uses debt artfully but responsibly. And the fact that its trailing twelve months of EBIT was 7.6 times its interest expenses harmonizes with that theme. Notably Leggett & Platt's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Leggett & Platt 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Leggett & Platt produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

When it comes to the balance sheet, the standout positive for Leggett & Platt was the fact that it seems able to convert EBIT to free cash flow confidently. But the other factors we noted above weren't so encouraging. For example, its level of total liabilities makes us a little nervous about its debt. When we consider all the elements mentioned above, it seems to us that Leggett & Platt is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Leggett & Platt (including 1 which doesn't sit too well with us) .

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.

What are the risks and opportunities for Leggett & Platt?

Leggett & Platt, Incorporated designs, manufactures, and markets engineered components and products worldwide.

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Rewards

  • Trading at 12.4% below our estimate of its fair value

Risks

  • Debt is not well covered by operating cash flow

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About NYSE:LEG

Leggett & Platt

Leggett & Platt, Incorporated designs, manufactures, and markets engineered components and products worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance2
Financial Health2
Dividends6

Read more about these checks in the individual report sections or in our analysis model.

6 star dividend payer and slightly overvalued.