Here's Why PPG Industries (NYSE:PPG) Can Manage Its Debt Responsibly

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.' 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, PPG Industries, Inc. (NYSE:PPG) does carry debt. But is this debt a concern to shareholders?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for PPG Industries

What Is PPG Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that PPG Industries had US$6.42b of debt in June 2024, down from US$6.92b, one year before. However, it does have US$1.20b in cash offsetting this, leading to net debt of about US$5.22b.

How Healthy Is PPG Industries' Balance Sheet?

According to the last reported balance sheet, PPG Industries had liabilities of US$5.23b due within 12 months, and liabilities of US$8.56b due beyond 12 months. Offsetting this, it had US$1.20b in cash and US$3.85b in receivables that were due within 12 months. So its liabilities total US$8.74b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because PPG Industries is worth a massive US$29.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

PPG Industries's net debt to EBITDA ratio of about 1.8 suggests only moderate use of debt. And its commanding EBIT of 33.7 times its interest expense, implies the debt load is as light as a peacock feather. One way PPG Industries could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 11%, as it did over the last year. 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 PPG 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, PPG Industries recorded free cash flow worth 50% 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

Happily, PPG Industries's impressive interest cover implies it has the upper hand on its debt. And we also thought its EBIT growth rate was a positive. Looking at all the aforementioned factors together, it strikes us that PPG Industries can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. To that end, you should be aware of the 1 warning sign we've spotted with PPG Industries .

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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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.