We think Gibraltar Industries (NASDAQ:ROCK) can stay on top of its debt
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Gibraltar Industries, Inc. (NASDAQ:ROCK) uses debt in its business. But should shareholders worry about its use of debt?
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Gibraltar Industries
How much debt does Gibraltar Industries have?
The image below, which you can click on for more details, shows that in June 2022, Gibraltar Industries had a debt of $93.5 million, compared to $32.3 million in one year. However, he has $17.1 million in cash to offset this, resulting in a net debt of approximately $76.3 million.
How strong is Gibraltar Industries’ balance sheet?
We can see from the most recent balance sheet that Gibraltar Industries had liabilities of $303.5 million due in one year and liabilities of $174.6 million beyond. On the other hand, it had $17.1 million in cash and $275.6 million in receivables within one year. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $185.4 million.
Given that publicly traded Gibraltar Industries shares are worth a total of US$1.45 billion, it seems unlikely that this level of liability is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.
We measure a company’s leverage against 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 charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Gibraltar Industries has a low net debt to EBITDA ratio of just 0.49. And its EBIT easily covers its interest costs, which is 61.2 times the size. So we’re pretty relaxed about his super-conservative use of debt. Fortunately, Gibraltar Industries has increased its EBIT by 8.4% over the past year, making this leverage even more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Gibraltar Industries’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Gibraltar Industries has recorded free cash flow of 56% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
The good news is that Gibraltar Industries’ demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, since its net debt to EBITDA also confirms this impression! When we consider the range of factors above, it appears that Gibraltar Industries is quite sensitive with its use of debt. While this carries some risk, it can also improve shareholder returns. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive chart of Gibraltar Industries Earnings Per Share History for free.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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