Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies ITT Inc. (NYSE: ITT) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest analysis for ITT
What is ITT’s net debt?
As you can see below, ITT had a debt of US $ 211.1 million in July 2021, up from US $ 260.3 million the year before. However, his balance sheet shows that he has $ 578.8 million in cash, so he actually has $ 367.7 million in net cash.
How strong is ITT’s balance sheet?
We can see from the most recent balance sheet that ITT had debts of US $ 900.0 million due within one year, and debts of US $ 422.0 million due. beyond. In return, he had $ 578.8 million in cash and $ 567.8 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 175.4 million.
Given that ITT has a market cap of $ 7.38 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While it has some liabilities to note, ITT also has more cash than debt, so we’re pretty confident it can handle its debt safely.
But the bad news is that ITT has seen its EBIT drop 19% over the past twelve months. If this rate of decline in profits continues, the company could find itself in a difficult situation. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine ITT’s 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.
Finally, a business can only pay off its debts with hard cash, not with book profits. ITT may have net cash on the balance sheet, but it is always interesting to consider the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its capacity. to manage debt. Over the past three years, ITT has generated strong free cash flow equivalent to 57% of its EBIT, which we expected. This free cash flow puts the business in a good position to repay debt, if any.
While it is always a good idea to look at a company’s total liabilities, it is very reassuring that ITT has US $ 367.7 million in net cash. We are therefore not concerned with ITT’s use of debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for ITT that you need to be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
If you decide to trade ITT, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account. Promoted
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 shares 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 material. Simply Wall St has no position in the mentioned stocks.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.