Some say that volatility is the best way to think about risk as an investor, rather than liability, but Warren Buffett famously said, “Volatility is not synonymous with risk.” Debt is often incurred when a business goes bankrupt, so it makes sense to consider a company’s balance sheet when considering a company’s risks. the important thing is, sherwin williams company (NYSE:SHW) is in debt. But is this liability a concern for shareholders?
when debt is dangerous
Debt is a tool that helps companies grow, but if companies can’t pay back their lenders, they exist at their mercy. If things get really bad, the lender will have control over the business. However, what happens more frequently (but costly) is when a company has to permanently dilute its shareholders and issue shares at a bargain just to strengthen its balance sheet. But by displacing dilution, debt can become a very good tool for companies that need capital to invest in growth at a high rate of return. The first thing to do when considering what you are using is to look at cash and debt together.
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What are Sherwin Williams’ debts?
You can click the chart below for historical figures, but as of September 2022, Sherwin Williams has US$10.5 billion in debt, up from US$8.98 billion over the course of the year. understand. And since they don’t have much cash, their net debt is about the same.
Summary of Sherwin-Williams Debt
Zooming in on the latest balance sheet data shows that Sherwin-Williams has $6.1 billion in debt due within the next 12 months and $13.6 billion in debt due over the next 12 months. Meanwhile, he had $130.5 million in cash and accounts receivable within her one year worth of $2.97 billion. As a result, we have a total of US$16.5 billion more debt than our cash and short-term debt combined.
While this may seem like a lot, Sherwin-Williams has a very large market capitalization of US$64 billion and may be able to bolster its balance sheet by raising capital when needed, so not much. Not bad. However, it is clear that it is necessary to rigorously consider whether debt can be managed without dilution.
We primarily use two ratios to show the level of debt to income. The first is Net Debt divided by Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA) and the second is Earnings Before Interest and Taxes (EBIT) equals interest expense (or interest for short). cover) is the number of times to cover. In this way we consider both the absolute amount of debt and the interest paid on it.
With a net debt to EBITDA of 3.1, Sherwin-Williams has a significant amount of debt. On the positive side, EBIT was 8.4 times interest expense and net debt to EBITDA was very high at 3.1. Sadly, his EBIT for Sherwin-Williams fell 3.2% last year. If this earnings trend continues, the debt will grow like a polar bear watching over its only cubs. Clearly, the balance sheet is the starting point when analyzing debt levels. However, it is future earnings that will determine, more than anything else, Sherwin-Williams’ ability to maintain a healthy balance sheet going forward. So, if you want to know what the experts think, this free report on analyst profit forecasts might be of interest to you.
Finally, the business needs free cash flow to pay off its debt. Accounting profit doesn’t cut it. So the logical step is to look at the percentage of EBIT that matches the actual free cash flow. In her most recent three years, Sherwin-Williams posted free cash flow equivalent to her 77% of her EBIT. Given that free cash flow excludes interest and taxes, this is mostly normal. This cold cash means you can reduce your debt when you need it.
In terms of the balance sheet, the standout positive for Sherwin-Williams is the fact that it appears to be able to confidently convert EBIT into free cash flow. But our other observations weren’t so encouraging. Based on EBITDA, for example, it looks like it’s going to have to struggle a little to handle its debt. Considering all the factors above, Sherwin-Williams appears to be managing debt very well. But be careful. We believe debt levels are high enough to justify continued monitoring. The balance sheet is clearly an area to focus on when analyzing liabilities. Ultimately, however, all companies may have the risk of existing off balance sheets.For example we discovered Sherwin-Williams One Warning Sign Things to know before investing here.
Check this out if you’re interested in investing in a profitable business without debt. freedom List of growth companies with net cash on their balance sheets.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …