Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that “volatility is nowhere near synonymous with risk.” So smart money seems to know that debt – which is usually associated with bankruptcies – is a very important factor in assessing a company’s risk. As with many other companies United Rentals, Inc. (NYSE: URI) leverages debt. But the real question is whether these debts make the company risky.
What is the risk of debt?
Debt and other liabilities become risky for a company when it cannot meet those obligations easily, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still more painful) scenario is that it needs to raise new equity at a low price, permanently diluting shareholders. Of course, debt can be an important tool in any business, especially in capital-intensive companies. The first thing to do when considering how much debt a company uses is to put its cash and debt together.
Check out our latest analysis for United Rentals
What is United Rentals’ net debt?
As you can see below, United Rentals was $ 8.95 billion in debt in March 2021, up from $ 11.5 billion the previous year. On the flip side, it has $ 278.0 million in cash, resulting in about $ 8.67 billion in net debt.
How strong is United Rentals’ balance sheet?
The latest balance sheet shows United Rentals had liabilities of $ 1.84 billion in one year and liabilities of $ 11.0 billion beyond. To offset these commitments, the company had cash of $ 278.0 million and receivables of $ 1.27 billion due within 12 months. So his debt is $ 11.3 billion more than the combination of cash and short-term receivables.
While this may seem like a lot, it isn’t that bad as United Rentals has a massive market cap of $ 21.6 billion, so it could likely bolster its balance sheet by raising capital if needed. Nevertheless, it is worthwhile to examine the debt repayment carefully.
To estimate a company’s debt in relation to its profits, 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.
United Rentals has a debt to EBITDA ratio of 3.8 and its EBIT covered interest expense 4.2 times. This suggests that while the debt is significant, we would not consider it problematic. Investors may also be concerned that United Rentals posted a 16% EBIT decline over the past twelve months. If things continue like this, dealing with the debt burden will be like delivering hot coffee on a pogo stick. Undoubtedly, we learn most about balance sheet debt. But, more than anything, future revenues will determine United Rentals’s ability to continue to run healthy. So if you are focused on the future, this is what you can check out here free Analyst earnings forecast report.
After all, while tax advisors may worship book profits, lenders only accept cold cash. That is why we always check how much of this EBIT is converted into free cash flow. For the past three years, United Rentals generated a very robust free cash flow of 85% of its EBIT, more than we expected. That positions it well to pay off debt if so desired.
The EBIT growth rate and the net debt to EBITDA of United Rentals are definitely having a negative impact in our view. But converting EBIT to free cash flow tells a completely different story and suggests some resilience. We think United Rentals debt makes it a bit risky after looking at the above data points together. Not all risk is bad as it can increase price returns if it pays off, but this debt risk should be kept in mind. When analyzing debt levels, the obvious starting point is the balance sheet. But ultimately, any business can involve off-balance sheet risks. These risks can be difficult to spot. Every company has them and we discovered them 2 warning signs for United Rentals you should know.
Ultimately, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% free, right now.
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