David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Clearwater Paper Corporation (NYSE: CLW) uses debt. But does this debt worry shareholders?
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. 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, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
What is Clearwater Paper’s debt?
As you can see below, Clearwater Paper owed US $ 676.5 million in debt in September 2021, up from US $ 766.0 million the year before. However, it has $ 27.8 million in cash offsetting that, leading to net debt of around $ 648.7 million.
NYSE: CLW Debt to Equity History December 12, 2021
How healthy is Clearwater Paper’s balance sheet?
According to the latest published balance sheet, Clearwater Paper had liabilities of US $ 256.9 million due within 12 months and liabilities of US $ 969.6 million due beyond 12 months. In return, he had $ 27.8 million in cash and $ 159.4 million in receivables due within 12 months. Its liabilities are therefore US $ 1.04 billion more than the combination of its cash and short-term receivables.
The lack here weighs heavily on the $ 687.1million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym gear, and a trumpet. . We would therefore monitor its record closely, without a doubt. After all, Clearwater Paper would likely need a major recapitalization if it were to pay its creditors today.
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.
While we’re not worried about Clearwater Paper’s net debt to EBITDA ratio of 3.6, we do think its ultra-low 1.9 times interest coverage is a sign of high leverage. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. Shareholders should therefore probably be aware that interest charges seem to have had a real impact on the company in recent times. Worse yet, Clearwater Paper’s EBIT was down 46% from a year ago. If the income continues like this for the long haul, there is an incredible chance to pay off that debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Clearwater Paper’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 Profit Forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Clearwater Paper’s free cash flow has been 35% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Our point of view
To be frank, Clearwater Paper’s level of total liabilities and its track record of (not) growing its EBIT makes us rather uncomfortable with its debt levels. But at least his conversion from EBIT to free cash isn’t that bad. Considering all of the above factors, it looks like Clearwater Paper has too much debt. This kind of risk is acceptable to some, but it certainly does not float our boat. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Clearwater Paper which you should know before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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