David Iben put it right when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies John Wiley & Sons, Inc. (NYSE: JW.A) uses debt. But the most important question is: what is the risk that this debt creates?
When is debt a problem?
Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest analysis for John Wiley & Sons
What is the debt of John Wiley & Sons?
The image below, which you can click for more details, shows that in January 2021, John Wiley & Sons was in debt of $ 967.2 million, up from $ 797.5 million in one year. On the other hand, it has US $ 91.3 million in cash, which leads to net debt of around US $ 875.9 million.
How healthy is John Wiley & Sons’ balance sheet?
According to the latest published balance sheet, John Wiley & Sons had liabilities of US $ 842.1 million due within 12 months and liabilities of US $ 1.52 billion beyond 12 months. On the other hand, he had US $ 91.3 million in cash and US $ 299.6 million in receivables due within one year. Its liabilities are therefore $ 1.97 billion more than the combination of its cash and short-term receivables.
While that may sound like a lot, it’s not that bad since John Wiley & Sons has a market cap of US $ 3.50 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 use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
John Wiley & Sons has a debt to EBITDA ratio of 2.7, which indicates significant debt, but is still fairly reasonable for most types of businesses. But its EBIT was around 13.7 times its interest expense, which means the company isn’t really paying a high cost to maintain that level of debt. Even if the low cost turned out to be unsustainable, that’s a good sign. Unfortunately, John Wiley & Sons has seen its EBIT slide 5.0% over the past twelve months. If profits continue to fall, it will be difficult to manage this debt, like delivering hot soup on a unicycle. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether John Wiley & Sons can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with cash, not book profits. We must therefore clearly consider whether this EBIT leads to a corresponding free cash flow. Over the past three years, John Wiley & Sons has produced strong free cash flow equivalent to 78% of its EBIT, which is what we expected. This hard, cold cash flow means he can reduce his debt whenever he wants.
Our point of view
John Wiley & Sons’ ability to cover its interest costs with its EBIT and its conversion of EBIT to free cash flow has reassured us about its ability to manage its debt. On the other hand, its EBIT growth rate makes us a little less comfortable about its debt. When you consider all the elements mentioned above, it seems to us that John Wiley & Sons is managing its debt quite well. But a caveat: We believe debt levels are high enough to warrant continued monitoring. 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. To this end, you should inquire about the 3 warning signs we spotted with John Wiley & Sons (including 1 which is potentially serious).
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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