Does DuPont de Nemours (NYSE: DD) have a healthy track record?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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 DuPont de Nemours, Inc. (NYSE: DD) uses debt. But does this debt worry shareholders?

Why Does Debt Bring Risk?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

What is the debt of DuPont de Nemours?

You can click on the graph below for historical figures, but it shows that DuPont de Nemours had $ 10.6 billion in debt in June 2021, up from $ 19.2 billion a year earlier. On the other hand, it has $ 3.96 billion in cash, resulting in net debt of around $ 6.66 billion.

NYSE: DD History of Debt to Equity October 22, 2021

A look at the liabilities of DuPont de Nemours

According to the latest published balance sheet, DuPont de Nemours had liabilities of $ 3.94 billion less than 12 months and liabilities of 14.4 billion dollars over 12 months. In return, he had $ 3.96 billion in cash and $ 2.83 billion in receivables due within 12 months. It therefore has liabilities totaling US $ 11.6 billion more than its cash and short-term receivables combined.

DuPont de Nemours has a very large market cap of US $ 37.8 billion, so it could most likely raise cash to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts.

We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Considering its net debt to EBITDA ratio of 1.2 and interest coverage of 3.4 times, it seems to us that DuPont de Nemours is probably using debt in a fairly reasonable way. We therefore recommend that you keep a close eye on the impact of financing costs on the business. Unfortunately, DuPont de Nemours’ EBIT fell 5.9% last year. If incomes continue to decline, managing that debt will be difficult, like delivering hot soup on a unicycle. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine DuPont de Nemours’ 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 earnings forecast report interesting.

Finally, a business needs free cash flow to repay its 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, DuPont de Nemours has recorded free cash flow of 56% of its EBIT, which is close to normal, given that free cash flow is net of interest and taxes. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

While DuPont de Nemours’ EBIT growth rate makes us cautious about this, its history of hedging its interest charges with its EBIT is no better. But it’s not so bad in managing its debt, based on its EBITDA. We think DuPont de Nemours’ debt makes it a bit risky, after considering the aforementioned data points together. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that DuPont de Nemours shows 3 warning signs in our investment analysis , and 1 of them makes us a little uncomfortable …

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 the mentioned stocks.

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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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