Some say volatility, rather than debt, is the best way to view 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 note that Herman Miller, Inc. (NASDAQ: MLHR) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Herman Miller
How much debt does Herman Miller carry?
You can click on the graph below for historical figures, but it shows that as of August 2021, Herman Miller was in debt of $ 1.34 billion, an increase from $ 351.9 million. , over one year. However, because it has a cash reserve of US $ 243.1 million, its net debt is less, at around US $ 1.09 billion.
How healthy is Herman Miller’s track record?
We can see from the most recent balance sheet that Herman Miller had liabilities of US $ 806.8 million maturing within one year and liabilities of US $ 2.11 billion maturing. beyond. In return, he had $ 243.1 million in cash and $ 307.6 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 2.36 billion.
This is a mountain of leverage compared to its market cap of US $ 2.88 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
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 over earnings with and without amortization charges.
Herman Miller’s net debt is 3.8 times its EBITDA, which represents significant leverage but still reasonable. However, its interest coverage of 11.6 is very high, suggesting that interest charges on debt are currently quite low. It is important to note that Herman Miller’s EBIT has fallen 28% over the past twelve months. If this decline continues, it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Herman Miller can strengthen his balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Herman Miller has generated strong free cash flow equivalent to 78% of his EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Herman Miller’s struggle to increase his EBIT made us question the strength of his balance sheet, but the other data points we considered were relatively interesting. In particular, his interest coverage was invigorating. Taking the above factors together, we believe that Herman Miller’s debt presents certain risks to the business. While this debt may increase returns, we believe the company now has sufficient leverage. 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. We have identified 5 warning signs with Herman Miller (at least 1 that cannot be ignored), and understanding them should be part of your investment process.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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 the mentioned stocks.
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