Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Myers Industries, Inc. (NYSE:MYE) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Myers Industries's Net Debt?
As you can see below, Myers Industries had US$77.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$83.7m in cash offsetting this, leading to net cash of US$6.27m.
How Healthy Is Myers Industries's Balance Sheet?
According to the last reported balance sheet, Myers Industries had liabilities of US$125.0m due within 12 months, and liabilities of US$53.8m due beyond 12 months. On the other hand, it had cash of US$83.7m and US$75.5m worth of receivables due within a year. So it has liabilities totalling US$19.5m more than its cash and near-term receivables, combined.
Of course, Myers Industries has a market capitalization of US$725.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Myers Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.
Another good sign is that Myers Industries has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Myers Industries 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. While Myers Industries 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. Happily for any shareholders, Myers Industries actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Myers Industries has US$6.27m in net cash. And it impressed us with free cash flow of US$25m, being 116% of its EBIT. So we don't think Myers Industries's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Myers Industries (including 1 which can't be ignored) .
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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