We believe Nutrien (TSE: NTR) can get his debt under control
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but the fact that you suffer a permanent loss of capital. “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Nutrien Ltd. (TSE: NTR) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is Nutrien’s net debt?
As you can see below, Nutrien had $ 10.3 billion in debt in June 2021, up from $ 11.3 billion the year before. However, it has $ 1.79 billion in cash offsetting that, leading to net debt of around $ 8.48 billion.
How strong is Nutrien’s balance sheet?
The latest balance sheet data shows that Nutrien had liabilities of US $ 9.89 billion due within one year, and liabilities of US $ 16.2 billion due thereafter. On the other hand, he had $ 1.79 billion in cash and $ 6.68 billion in receivables due within a year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 17.6 billion.
While that may sound like a lot, it’s not that big of a deal since Nutrien has a massive market cap of US $ 38.8 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.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Nutrien’s net debt stands at a very reasonable level of 2.2 times its EBITDA, while its EBIT only covered its interest expense 5.0 times last year. While this doesn’t worry us too much, it does suggest that the interest payments are somewhat of a burden. We note that Nutrien has increased its EBIT by 26% over the past year, which should make it easier to repay debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Nutrien can strengthen its balance sheet over time. 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, Nutrien has generated free cash flow amounting to a very solid 86% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.
Our point of view
The good news is that Nutrien’s proven ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. But frankly, we think his total passive level undermines that feeling a bit. Considering all this data, it seems to us that Nutrien has a pretty sane approach to debt. This means that they are taking a bit more risk, in the hope of increasing returns for shareholders. 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 have identified 4 warning signs for Nutrien (1 is a bit rude) you should be aware of.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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 material. Simply Wall St has no position in any of the stocks mentioned.
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