Does Hillenbrand (NYSE: HI) have a healthy track record?
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. ‘ 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 Hillenbrand, Inc. (NYSE: HI) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.
Check out our latest analysis for Hillenbrand
What is Hillenbrand’s debt?
As you can see below, Hillenbrand had $ 1.21 billion in debt in March 2021, up from $ 1.87 billion the year before. On the other hand, it has $ 344.9 million in cash, resulting in net debt of around $ 867.0 million.
A look at Hillenbrand’s responsibilities
Zooming in on the latest balance sheet data, we can see that Hillenbrand had a liability of US $ 920.5 million due within 12 months and a liability of US $ 1.76 billion beyond. On the other hand, he had $ 344.9 million in cash and $ 442.6 million in receivables due in one year. It therefore has liabilities totaling US $ 1.89 billion more than its cash and short-term receivables combined.
This deficit is not that big as Hillenbrand is worth $ 3.34 billion, and therefore could possibly raise enough capital to consolidate its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Hillenbrand has net debt of 1.6 times EBITDA, which isn’t too much, but his interest coverage looks a bit weak, with EBIT at just 5.1 times interest expense. While this doesn’t worry us too much, it does suggest that the interest payments are somewhat of a burden. It should be noted that Hillenbrand’s EBIT has soared like bamboo after the rain, gaining 58% in the past twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future earnings, more than anything, that will determine Hillenbrand’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Hillenbrand has recorded free cash flow totaling 99% of its EBIT, which is higher than what we would normally expect. This positions it well to repay debt if it is desirable.
Our point of view
The good news is that Hillenbrand’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned with its total liability level. Given all of this data, it seems to us that Hillenbrand is taking a pretty sane approach to debt. While this carries some risk, it can also improve returns for shareholders. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Hillenbrand shows 1 warning sign in our investment analysis , you must know…
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