These 4 metrics indicate that Zurn Water Solutions (NYSE: ZWS) is using debt reasonably well
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 can see that Zurn Water Solutions Company (NYSE: ZWS) uses debt in its business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
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. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Zurn Water Solutions
How much debt does Zurn Water Solutions have?
As you can see below, Zurn Water Solutions was in debt of US $ 1.12 billion, as of September 2021, which is roughly the same as the year before. You can click on the graph for more details. However, given that it has a cash reserve of US $ 477.6 million, its net debt is less, at around US $ 641.5 million.
How healthy is Zurn Water Solutions’ balance sheet?
According to the latest published balance sheet, Zurn Water Solutions had liabilities of US $ 420.7 million due within 12 months and liabilities of US $ 1.62 billion due beyond 12 months. On the other hand, it had US $ 477.6 million in cash and US $ 341.6 million in receivables due in one year. It therefore has liabilities totaling US $ 1.22 billion more than its cash and short-term receivables combined.
This shortfall is not that big as Zurn Water Solutions is worth $ 4.51 billion, so it could probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
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.
With net debt of just 1.5 times EBITDA, Zurn Water Solutions is arguably fairly cautious. And it has 7.7 times interest coverage, which is more than enough. And we also warmly note that Zurn Water Solutions increased its EBIT by 19% last year, which makes its debt more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Zurn Water Solutions 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, Zurn Water Solutions has generated strong free cash flow equivalent to 78% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Zurn Water Solutions’ impressive conversion of EBIT to free cash flow means that it has the upper hand over its debt. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! When we consider the range of factors above, it looks like Zurn Water Solutions is pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that Zurn Water Solutions shows 3 warning signs in our investment analysis , and 1 of them is a bit rude …
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 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 any of the stocks mentioned.
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