We believe ESCO Technologies (NYSE: ESE) can keep up with its debt
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.” It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that ESCO Technologies Inc. (NYSE: ESE) uses debt in its business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. 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 stock 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. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for ESCO Technologies
How much debt is ESCO Technologies?
You can click on the graph below for the historical numbers, but it shows that ESCO Technologies had $ 22.0 million in debt in March 2021, up from $ 152.0 million a year earlier. However, his balance sheet shows that he has US $ 45.7 million in cash, so he actually has US $ 23.7 million in net cash.
A look at the responsibilities of ESCO Technologies
According to the latest published balance sheet, ESCO Technologies had liabilities of US $ 246.6 million due within 12 months and liabilities of US $ 115.8 million beyond 12 months. In return, it had US $ 45.7 million in cash and US $ 219.6 million in receivables due within 12 months. Its liabilities therefore exceed the sum of its cash and (short-term) receivables by US $ 97.2 million.
Given that ESCO Technologies’ publicly traded shares are worth a total of US $ 2.50 billion, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite its notable liabilities, ESCO Technologies has a net cash flow, so it’s fair to say that it doesn’t have heavy debt!
But the bad news is that ESCO Technologies has seen its EBIT plunge 10% over the past twelve months. We believe that such a performance, if repeated frequently, could well cause difficulties for the title. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether ESCO Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with cash, not book profits. ESCO Technologies may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. to manage debt. Over the past three years, ESCO Technologies has produced strong free cash flow equivalent to 65% of its EBIT, which we expected. This free cash flow puts the business in a good position to repay debt, if any.
We could understand if investors are concerned about ESCO Technologies’ commitments, but we can be reassured that it has net cash of US $ 23.7 million. We therefore have no problem with the use of debt by ESCO Technologies. 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. For example – ESCO Technologies has 3 warning signs we think you should be aware of this.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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