These 4 metrics indicate that Ball (NYSE: BLL) is using debt reasonably well
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but suffering a permanent loss of capital.” . When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Ball company (NYSE: BLL) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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 costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for Ball
What is Ball’s debt?
As you can see below, Ball was in debt of $ 7.73 billion, as of June 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 $ 571.0 million, its net debt is less, at around US $ 7.16 billion.
How healthy is Ball’s track record?
We can see from the most recent balance sheet that Ball had liabilities of US $ 5.92 billion maturing within one year and liabilities of US $ 9.53 billion maturing beyond that. On the other hand, he had $ 571.0 million in cash and $ 2.62 billion in receivables due within a year. Its liabilities therefore total $ 12.3 billion more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not that big of a deal since Ball has a massive market cap of US $ 29.3 billion, so she could likely strengthen her balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debts.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Ball’s debt is 3.5 times its EBITDA, and its EBIT covers its interest expense 5.1 times. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. One way for Ball to beat his debt would be to stop borrowing more but continue to increase his EBIT by around 15%, as he did last year. There is no doubt that we learn the most about debt from the balance sheet. But it’s future profits, more than anything, that will determine Ball’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Ball’s 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
When it comes to the balance sheet, the biggest bright spot for Ball was the fact that he seems able to increase his EBIT with confidence. But the other factors we noted above weren’t so encouraging. For example, its net debt to EBITDA makes us a little nervous about its debt. When we consider all of the factors mentioned above, we feel a little cautious about Ball’s use of debt. While debt has its advantage in terms of potential higher returns, we believe shareholders should definitely consider how leverage levels might make the stock riskier. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 1 bullet warning sign 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.
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 documents. Simply Wall St has no position in the mentioned stocks.
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