Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett once said that “volatility is far from synonymous with risk.” It seems the smart money knows that debt – which usually comes with bankruptcies – is a very important factor when you assess how risky a company is. important, Beacon Roofing Supply, Inc. (NASDAQ:BECN) does bear debt. But is this debt a concern for shareholders?
What risk does debt entail?
In general, debt only becomes a real problem when a company cannot easily pay it off, either by raising capital or using its own cash flow. If the company can’t meet its legal obligations to repay debts, shareholders may end up walking away with nothing. However, a more common (but still painful) scenario is that it needs to raise new equity at a low price, permanently diluting shareholders. See the article : Pro West Roofing explains the benefits and value of a foam roof. That said, the most common situation is for a company to manage its debt fairly well – and for its own benefit. The first step in considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Beacon Roofing Supply
How Much Debt Does Beacon Roofing Supply Carry?
As you can see below, Beacon Roofing Supply had US$2.10 billion in debt in March 2021, down from US$3.53 billion a year earlier. This may interest you : HD Roofing and Repairs Nominated as Round Rocks Largest Family-Owned Roofing Contractor. However, because it has a cash reserve of $619.3 million, its net debt is less, at about $1.48 billion.
A Look at Beacon Roofing Supply’s Commitments
According to the latest reported balance sheet, Beacon Roofing Supply had liabilities of $1.36 billion due within 12 months and liabilities of $2.38 billion after 12 months. To offset these obligations, it held USD 619. To see also : Shamrock Roofing & Construction | Putting Unity in Community College Scholarship – Miami County Republic.3 million in cash, as well as USD 759.5 million receivables to be paid within 12 months. So his liabilities total US$2.36 billion more than the combination of his cash and receivables.
This shortfall is significant relative to the market cap of US$3.73 billion, so it suggests that shareholders should keep an eye on Beacon Roofing Supply’s debt utilization. This suggests that shareholders would be highly diluted if the company had to strengthen its balance sheet quickly.
To upgrade a company’s debt relative to revenue, we calculate net debt divided by revenue before interest, taxes, depreciation, and amortization (EBITDA) and revenue before interest and tax (EBIT) divided by interest expense (are interest cover). In this way, we take into account both the absolute amount of the debt and the interest rates paid on it.
Beacon Roofing Supply has a debt to EBITDA ratio of 2.6 and EBIT covered interest charges 2.8 times. This suggests that while debt levels are significant, we would no longer call them problematic. On the bright side, Beacon Roofing Supply increased its EBIT by a silky smooth 92% over the past year. Like a mother’s loving embrace of a newborn, such growth builds resilience, putting the company in a stronger position to manage its debts. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the company will decide whether Beacon Roofing Supply can strengthen its balance sheet over time. So if you want to see what the pros think, you might find this free analyst earnings forecast report of interest.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t do it. So the logical step is to look at the portion of that EBIT that is matched by actual free cash flow. Fortunately for all shareholders, Beacon Roofing Supply has produced more free cash flow than EBIT over the past three years. That kind of strong money generation warms our hearts like a puppy in a bumblebee suit.
Our view
The good news is that Beacon Roofing Supply’s proven ability to convert EBIT into free cash flow delights us like a fuzzy puppy does a toddler. But the stark truth is that we are concerned about interest coverage. When we consider all of the above factors together, we notice that Beacon Roofing Supply manages its debt quite well. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside within the balance sheet – far from it. For example, we have established: 2 Beacon Roofing Supply Warning Signs (1 makes us a little uncomfortable) which you should be aware of.
When all is said and done, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% free, straight away.
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