Stock Analysis
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.' 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. We can see that Conagra Brands, Inc. (NYSE:CAG) does use debt in its business. But the more important question is: how much risk is that debt creating?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Conagra Brands
What Is Conagra Brands's Debt?
The chart below, which you can click on for greater detail, shows that Conagra Brands had US$9.12b in debt in August 2021; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.
A Look At Conagra Brands' Liabilities
We can see from the most recent balance sheet that Conagra Brands had liabilities of US$3.09b falling due within a year, and liabilities of US$10.8b due beyond that. On the other hand, it had cash of US$67.0m and US$834.4m worth of receivables due within a year. So its liabilities total US$13.0b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its very significant market capitalization of US$15.2b, so it does suggest shareholders should keep an eye on Conagra Brands' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Conagra Brands's debt is 4.0 times its EBITDA, and its EBIT cover its interest expense 4.7 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Notably Conagra Brands's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Conagra Brands can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Conagra Brands recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Our View
Both Conagra Brands's net debt to EBITDA and its level of total liabilities were discouraging. At least its conversion of EBIT to free cash flow gives us reason to be optimistic. Taking the abovementioned factors together we do think Conagra Brands's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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. For instance, we've identified 2 warning signs for Conagra Brands (1 is significant) you should be aware of.
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 Conagra Brands?
Conagra Brands, Inc., together with its subsidiaries, operates as a consumer packaged goods food company in North America.
Rewards
Trading at 63.4% below our estimate of its fair value
Earnings are forecast to grow 17.36% per year
Risks
Debt is not well covered by operating cash flow
Large one-off items impacting financial results
Further research on
Conagra Brands
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.
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About NYSE:CAG
Conagra Brands
Conagra Brands, Inc., together with its subsidiaries, operates as a consumer packaged goods food company in North America.
Undervalued average dividend payer.
