Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Air Products and Chemicals, Inc. (NYSE: APD) is in debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Air Products and Chemicals
How much debt do Air Products and Chemicals carry?
The graph below, which you can click for more details, shows that Air Products and Chemicals had $ 7.66 billion in debt as of September 2021; about the same as the year before. However, it has $ 5.82 billion in cash offsetting that, leading to net debt of around $ 1.85 billion.
How strong is Air Products and Chemicals’ balance sheet?
The latest balance sheet data shows Air Products and Chemicals had $ 2.80 billion in debt due within one year, and $ 9.97 billion in debt due thereafter. In return, he had $ 5.82 billion in cash and $ 1.66 billion in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 5.30 billion.
Considering that Air Products and Chemicals has a whopping market cap of US $ 65.9 billion, it’s hard to believe that these liabilities pose a big threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Air Products and Chemicals has a low net debt to EBITDA ratio of just 0.50. And its EBIT easily covers its interest costs, being 16.6 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Fortunately, Air Products and Chemicals has increased its EBIT by 4.8% over the past year, which makes this debt load even more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Air Products and Chemicals’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years Air Products and Chemicals free cash flow has been 39% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Our point of view
Air Products and Chemicals’ interest coverage suggests she can manage her debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And that’s just the start of the good news as its net debt to EBITDA is also very encouraging. Looking at all of the above factors together, it seems to us that Air Products and Chemicals can manage its debt quite comfortably. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Air Products and Chemicals has 1 warning sign we think you should be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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