David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Walmart inc. (NYSE: WMT) uses debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth 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 Walmart
What is Walmart’s debt?
As you can see below, Walmart had $ 42.5 billion in debt in July 2021, up from $ 47.6 billion the year before. However, it has $ 22.8 billion in cash offsetting that, leading to net debt of around $ 19.7 billion.
How healthy is Walmart’s track record?
Zooming in on the latest balance sheet data, we can see that Walmart had US $ 81.1 billion in liabilities owed within 12 months and US $ 70.3 billion in liabilities owed beyond. In return, he had $ 22.8 billion in cash and $ 6.10 billion in receivables due within 12 months. It therefore has liabilities totaling $ 122.5 billion more than its cash and short-term receivables combined.
While that might sound like a lot, it’s not that bad since Walmart has a massive market cap of US $ 391.8 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.
We measure a company’s debt load relative to its earning capacity 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 costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Walmart has a low net debt to EBITDA ratio of just 0.49. And its EBIT covers its interest costs 14.6 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, we’re happy to report that Walmart has increased its EBIT by 31%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But it’s future profits, more than anything, that will determine Walmart’s 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.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Walmart has recorded free cash flow of 79% 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
Fortunately, Walmart’s impressive interest coverage means it has the upper hand on its debt. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Considering this array of factors, it seems to us that Walmart is fairly conservative with its debt, and the risks appear to be well managed. The balance sheet therefore seems rather healthy to us. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 4 warning signs for Walmart which you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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 documents. Simply Wall St does not have any position in the mentioned stocks.
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