Is Levi Strauss (NYSE:LEVI) A Risky Investment?

Simply Wall St
January 24, 2022
Source: Shutterstock

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Levi Strauss & Co. (NYSE:LEVI) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Levi Strauss

What Is Levi Strauss's Debt?

The image below, which you can click on for greater detail, shows that Levi Strauss had debt of US$1.25b at the end of August 2021, a reduction from US$1.57b over a year. But on the other hand it also has US$1.47b in cash, leading to a US$221.3m net cash position.

NYSE:LEVI Debt to Equity History January 24th 2022

How Strong Is Levi Strauss' Balance Sheet?

We can see from the most recent balance sheet that Levi Strauss had liabilities of US$1.77b falling due within a year, and liabilities of US$2.61b due beyond that. On the other hand, it had cash of US$1.47b and US$667.3m worth of receivables due within a year. So it has liabilities totalling US$2.24b more than its cash and near-term receivables, combined.

Levi Strauss has a market capitalization of US$8.60b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Levi Strauss boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Levi Strauss grew its EBIT by 249% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Levi Strauss's ability to maintain a healthy balance sheet going forward. 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 Levi Strauss 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 last three years, Levi Strauss recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Levi Strauss does have more liabilities than liquid assets, it also has net cash of US$221.3m. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in US$578m. So is Levi Strauss's debt a risk? It doesn't seem so to us. 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. Be aware that Levi Strauss is showing 2 warning signs in our investment analysis , you should know about...

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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