Does Halliburton (NYSE: HAL) have a healthy track record?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from 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. We notice that Halliburton Company (NYSE: HAL) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

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. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.

See our latest analysis for Halliburton

What is Halliburton’s net debt?

You can click on the graph below for historical numbers, but it shows Halliburton owed $ 9.14 billion in debt in September 2021, up from $ 9.83 billion a year earlier. On the other hand, it has $ 2.63 billion in cash, resulting in net debt of around $ 6.50 billion.

NYSE: HAL Debt to Equity History January 7, 2022

A look at Halliburton’s responsibilities

According to the latest published balance sheet, Halliburton had liabilities of US $ 3.95 billion due within 12 months and liabilities of US $ 11.4 billion due beyond 12 months. In return, he had $ 2.63 billion in cash and $ 3.53 billion in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 9.18 billion.

Halliburton has a very large market cap of US $ 22.9 billion, so it could most likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.

Halliburton’s debt is 2.8 times its EBITDA, and its EBIT covers its interest expense 3.0 times as much. This suggests that while debt levels are significant, we would stop calling them problematic. However, it should be heartwarming for shareholders to remember that Halliburton has actually increased its EBIT by 298%, over the past 12 months. If he can continue on this path, he will be able to deleverage with relative ease. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Halliburton can strengthen its balance sheet over time. 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, Halliburton has recorded free cash flow totaling 81% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.

Our point of view

Fortunately, Halliburton’s impressive conversion of EBIT to free cash flow means it has the upper hand over its debt. But the hard truth is that we are concerned about its coverage of interest. Looking at all of the aforementioned factors together, it seems to us that Halliburton can handle his debt quite comfortably. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Know that Halliburton shows 2 warning signs in our investment analysis , and 1 of them is potentially serious …

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.

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 material. Simply Wall St has no position in any of the stocks mentioned.

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