Does Itron (NASDAQ: ITRI) have a healthy track record?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Itron, Inc. (NASDAQ: ITRI) uses debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Itron
What is Itron’s net debt?
The image below, which you can click for more details, shows Itron owed $ 880.3 million in debt at the end of March 2021, a reduction from $ 1.33 billion. US over one year. However, he also had $ 574.6 million in cash, so his net debt is $ 305.7 million.
Is Itron’s track record healthy?
According to the latest published balance sheet, Itron had liabilities of US $ 909.6 million due within 12 months and liabilities of US $ 797.2 million due beyond 12 months. On the other hand, he had $ 574.6 million in cash and $ 365.8 million in receivables due within a year. Its liabilities therefore total US $ 766.4 million more than the combination of its cash and short-term receivables.
Given that publicly traded Itron shares are worth a total of US $ 4.46 billion, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While Itron has a fairly reasonable net debt to EBITDA ratio of 1.7, its interest coverage appears low at 2.1. The main reason is that it has such high depreciation and amortization. These charges can be non-monetary, so they could be excluded when it comes to paying off debt. But the accounting fees are there for a reason: some assets lose value. Either way, there’s no doubt that the stock uses significant leverage. Shareholders should know that Itron’s EBIT fell 43% last year. If this decline continues, it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future profits, more than anything, that will determine Itron’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.
But our last consideration is also important, because a company 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, Itron has generated free cash flow of 80% of its very robust EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
Our point of view
Itron’s EBIT growth rate and interest coverage certainly weighs on this, in our view. But the good news is that it seems to be able to easily convert EBIT into free cash flow. We think Itron’s debt makes it a bit risky, having looked at the aforementioned data points together. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. 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 – Itron has 2 warning signs we think you should be aware.
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. 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 has no position in the mentioned stocks.
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