“The biggest investment risk is not price volatility, but whether we suffer a permanent loss of capital,” says Lee Lu, an external fund manager backed by Berkshire Hathaway’s Charlie Munger. . So, given how risky certain stocks are, it’s clear that debt needs to be considered, as too much debt can sink a company.Like many other companies Wattsco Co., Ltd. (NYSE:WSO) uses debt. But the bigger question is how much risk does that liability create?
What are the risks of borrowing?
Debt is a tool that helps companies grow, but if companies can’t pay back their lenders, they exist at their mercy. In the worst case, companies that cannot pay their creditors may go bankrupt. But a more common (but still costly) situation is when a company has to dilute its shareholders with a cheap stock price just to manage its debt. But by displacing dilution, debt can be a very good tool for companies that need capital to invest in growth at high returns. First, we look at both cash and debt levels together.
See Watsco’s latest analysis.
How much debt does Watsco have?
You can click the chart below for historical numbers, but as of September 2022, we can see that Watsco has $8.8 million in debt, up from $1.72 million over the course of the year. However, he also holds US$130.2 million in cash, leading to a net cash position of US$121.4 million.
How strong is Watsco’s balance sheet?
According to the latest balance sheet data, Watsco will pay off $939.5 million in debt within one year and $328.9 million in debt after that. On the other hand, there was US$130.2 million in cash and US$859.6 million worth of his receivables to be paid within a year. As such, his liabilities exceed his combined cash and (short-term) receivables by US$278.6 million.
Given Watsco’s $9.13 billion market capitalization, these debts are unlikely to pose a significant threat. However, we believe it is worth keeping an eye on the strength of the balance sheet as it may change over time. Despite notable debt, Watsco boasts net cash. Therefore, it is no exaggeration to say that we do not have a large amount of debt.
On top of that, Watsco is happy to report that EBIT increased by 43% and eased concerns about future debt repayments. The balance sheet is clearly an area to focus on when analyzing liabilities. However, future earnings will determine Watsuko’s ability to maintain a healthy balance sheet more than anything else.So if you are focused on the future check this out freedom A report that shows an analyst’s profit forecast.
Finally, companies can pay off their debt only with cold cash, not with accounting profits. Watsco has net cash on its balance sheet, but it’s worth noting its ability to convert earnings before interest and taxes (EBIT) into free cash flow. Over the past three years, Watsco has generated stable free cash flow representing 76% of his EBIT. This cold cash means you can reduce your debt when you need it.
summary
We can understand if investors are concerned about Watsco’s debt, but the fact that it has $121.4 million in net cash is comforting. Also, his EBIT growth last year he was 43% which impressed us. So is Watsco’s debt a risk? We don’t think so. 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, Two Watsco Warning Signs (1 is a little disgusting) Caution is required.
After all, if you’re interested in a fast-growing company with a solid balance sheet, check out our list of net cash growth stocks right away.
What are the risks and opportunities Watsuko?
Watsco, Inc., along with its subsidiaries, markets air conditioning, heating and refrigeration equipment and related parts and supplies.
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reward
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Trading at 5.3% below estimated fair value
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Revenue has grown 19.4% annually over the last 5 years
risk
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Over the next three years, revenue is projected to decline by an average of 2.1% annually
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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 …