These 4 Measures Indicate That Leggett & Platt (NYSE:LEG) Is Using Debt Reasonably Well

Some say that volatility, rather than leverage, is the best way for investors to think about risk, but Warren Buffett famously said that “volatility is far from synonymous with risk.” So it might be obvious that you need to consider debt when considering how risky a particular stock is, because too much debt can send a company into the abyss. Important, Leggett & Platt, Incorporated (NYSE:LEG) is in debt. But is that debt a problem for shareholders?

Why is debt a risk?

Debt typically only becomes a real problem when a company cannot easily repay it, whether by raising capital or using its own cash flow. If things get really bad, lenders can take control of the deal. While not all that common, we often see leveraged companies permanently diluting shareholders as lenders force them to raise capital at a distressed price. Of course, many companies use debt to fund growth, with no ill effects. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.

Check out our latest analysis for Leggett & Platt

What is Leggett & Platt’s debt?

The chart below, which you can click for more details, shows that Leggett & Platt had $2.09 billion in debt as of June 2022; about the same as the year before. However, the company has cash on hand of $269.9 million, resulting in net debt of approximately $1.82 billion.

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Debt Equity History Analysis
NYSE:LEG Debt to Equity History October 3, 2022

How strong is Leggett & Platt’s balance sheet?

The latest balance sheet data shows that Leggett & Platt had $1.33 billion in debt maturing within one year and $2.28 billion in debt maturing thereafter. On the other hand, it had $269.9 million in cash and $722.6 million in accounts receivable that were due within a year. Therefore, its liabilities exceed the sum of its cash and (short-term) receivables by $2.62 billion.

While that might seem like a lot, it’s not too bad given that Leggett & Platt has a market cap of $4.41 billion, so it could likely strengthen its balance sheet by raising capital if the need arose. Still, it’s worth taking a close look at debt repayment ability.

To estimate a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its interest expense (its interest coverage). In this way, we take into account both the absolute amount of the debt and the interest paid on it.

With a debt-to-EBITDA ratio of 2.4, Leggett & Platt manages debt adeptly but responsibly. And the fact that trailing 12-month EBIT was 7.6 times interest expense fits this theme. Leggett & Platt’s EBIT, in particular, was fairly flat last year. We would prefer some earnings growth as that always helps deleverage. Undoubtedly, we learn most about debt from the balance sheet. But ultimately, the company’s future profitability will determine whether Leggett & Platt can strengthen its balance sheet over time. So if you focus on the future, you can check this free Analyst earnings forecast report.

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After all, a business needs free cash flow to pay off debt; Accounting profits just don’t cut it. So the logical step is to look at the proportion of that EBIT that corresponds to actual free cash flow. Over the past three years, Leggett & Platt has generated robust free cash flow that’s equal to 76% of its EBIT, which is roughly in line with our expectations. This cold, hard money means they can reduce their debt whenever they want.

Our view

On the balance sheet, the standout positive for Leggett & Platt was the fact that it appears able to confidently convert EBIT to free cash flow. But the other factors we mentioned above weren’t so encouraging. For example, the level of total debt makes us a little nervous about leverage. When we consider all of the above elements, it seems to us that Leggett & Platt is managing its debt quite well. However, the strain is such that we would recommend all shareholders to keep a close eye on it. Undoubtedly, we learn most about debt from the balance sheet. However, the entire investment risk is not on the balance sheet – far from it. You should find out more about this 2 warning signs we have sighted with Leggett & Platt (including 1 which doesn’t suit us too well).

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Of course, if you’re one of those investors who prefer to buy stocks without the burden of debt, don’t hesitate to explore our exclusive list of net cash growth stocks today.

This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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