We Believe Pool (NASDAQ:POOL) Can Manage Debt – Nasdaq | Vette Leader

Backed by Berkshire Hathaway’s Charlie Munger, outside fund manager Li Lu makes no bones about it when he says, “The biggest investment risk isn’t price volatility, it’s whether you will suffer a permanent loss of capital.” So it might be obvious that you need to consider debt when considering how risky a particular stock is, because too much debt can send a company into the abyss. We can see that Pool Corporation (NASDAQ:POOL) uses debt in its business. But the more important question is: How much risk does this debt carry?

When is debt a problem?

Debt typically only becomes a real problem when a company cannot easily repay it, whether by raising capital or using its own cash flow. If things get really bad, lenders can take control of the deal. While not all that common, we often see leveraged companies permanently diluting shareholders as lenders force them to raise capital at a distressed price. Of course, many companies use debt to fund growth, with no ill effects. The first step in looking at a company’s debt is to look at its cash and debt together.

What is Pool’s Net Debt?

The image below, which you can click for more details, shows Pool had $1.60 billion in debt as of June 2022, up from $435.2 million in one year. On the other hand, it has $116.3 million in cash, which translates to about $1.48 billion in net debt.

NasdaqGS:POOL Debt to Equity History August 15, 2022

A look at Pool’s liabilities

If we take a closer look at the latest balance sheet data, we can see that Pool had $891.0 million in debt that was due within 12 months and $1.84 billion in debt that were also due. Against these obligations, the Company had cash of $116.3 million and accounts receivable of $756.6 million that were due within 12 months. So it has total liabilities of $1.86 billion, more than its cash and short-term receivables combined.

With publicly traded pool stocks having a very impressive combined value of $15.4 billion, it seems unlikely that that level of liabilities would pose a major threat. But there are enough liabilities that we would definitely recommend that shareholders keep an eye on the balance sheet going forward.

We use two main metrics to tell us about debt versus earnings. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), the second is how often earnings before interest and taxes (EBIT) cover its interest expense (or interest coverage for short). . The advantage of this approach is that we consider both the absolute level of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).

Pool’s net debt is just 1.4 times its EBITDA. And its EBIT covers its interest expense a whopping 58.1 times. So you could argue that it’s no more threatened by its debt than an elephant is by a mouse. Additionally, Pool has grown its EBIT by 47% over the trailing 12 months, and that growth will make it easier to manage its debt. Undoubtedly, we learn most about debt from the balance sheet. But it’s future profits that will determine Pool’s ability to maintain a healthy balance sheet well into the future. So if you focus on the future, you can check this free Analyst earnings forecast report.

But our final consideration is also important, because a company cannot pay off debt with paper profits; it takes hard cash. So it’s worth checking how much of that EBIT is covered by free cash flow. Over the last three years, Pool’s free cash flow has been 41% of EBIT, less than we expected. That’s not great when it comes to paying off debt.

Our view

The good news is that Pool’s proven ability to cover its interest expense with its EBIT pleases us like a fluffy puppy pleases a toddler. And that’s just the beginning of the good news, because the EBIT growth rate is also very encouraging. When we consider the range of factors above, it looks like pooling is pretty reasonable with the use of debt. While that carries some risk, it can also boost returns for shareholders. The balance sheet is clearly the area to focus on when analyzing debt. However, the entire investment risk is not on the balance sheet – far from it. Case in point: We discovered it 3 pool warning signs you should be aware of this.

Of course, if you’re one of those investors who prefer to buy stocks without the burden of debt, don’t hesitate to explore our exclusive list of net cash growth stocks today.

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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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