Warren Buffett famously said, '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 Seaboard Corporation (NYSEMKT:SEB) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Seaboard's Debt?
The chart below, which you can click on for greater detail, shows that Seaboard had US$1.01b in debt in September 2020; about the same as the year before. But it also has US$1.34b in cash to offset that, meaning it has US$326.0m net cash.
A Look At Seaboard's Liabilities
The latest balance sheet data shows that Seaboard had liabilities of US$1.01b due within a year, and liabilities of US$1.42b falling due after that. Offsetting these obligations, it had cash of US$1.34b as well as receivables valued at US$525.0m due within 12 months. So its liabilities total US$569.0m more than the combination of its cash and short-term receivables.
Since publicly traded Seaboard shares are worth a total of US$3.63b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Seaboard also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, Seaboard grew its EBIT by 253% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Seaboard's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Seaboard 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, Seaboard burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Although Seaboard's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$326.0m. And it impressed us with its EBIT growth of 253% over the last year. So we don't have any problem with Seaboard's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Seaboard has 1 warning sign we think you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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