Is Post Holdings (NYSE: POST) Using Too Much Debt?
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ 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 can see that Post Holdings, Inc. (NYSE: POST) uses debt in its business. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
See our latest analysis for Post Holdings
How much debt does Post Holdings have?
The graph below, which you can click for more details, shows Post Holdings owed US $ 7.42 billion in debt as of September 2021; about the same as the year before. However, it has $ 817.1 million in cash offsetting that, leading to net debt of around $ 6.60 billion.
How healthy is Post Holdings’ balance sheet?
According to the latest published balance sheet, Post Holdings had debt of US $ 1.05 billion due within 12 months and debt of US $ 8.31 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 817.1 million as well as receivables valued at US $ 553.9 million due within 12 months. It therefore has liabilities totaling US $ 7.98 billion more than its cash and short-term receivables combined.
Given that this deficit is actually greater than the company’s market cap of $ 7.14 billion, we think shareholders should really watch Post Holdings’ debt levels, like a parent watching their child do. cycling for the first time. In theory, extremely large dilution would be required if the company were forced to repay debts by raising capital at the current share price.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt versus earnings with and without amortization expenses.
Post Holdings has a fairly high debt to EBITDA ratio of 6.1 which suggests significant leverage. But the good news is that he enjoys quite a comforting 2.7 times interest coverage, which suggests he can meet his obligations responsibly. Given the leverage, it is not ideal that Post Holdings’ EBIT has been fairly stable over the past twelve months. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Post Holdings’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Post Holdings has recorded free cash flow of 56% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
We would go so far as to say that Post Holdings’ net debt to EBITDA was disappointing. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. Overall, we think it’s fair to say that Post Holdings has enough debt that there is real risk around the balance sheet. If all goes well, this should increase returns, but on the other hand, the risk of permanent capital loss is increased by debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for Post Holdings (1 is not doing too well with us) you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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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 any stock 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 any of the stocks mentioned.