These 4 Measures Indicate That Campbell Soup (NYSE:CPB) Is Using Debt Reasonably Well
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Campbell Soup Company (NYSE:CPB) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Campbell Soup
What Is Campbell Soup’s Debt?
As you can see below, Campbell Soup had US$5.19b of debt at May 2021, down from US$6.69b a year prior. However, it does have US$209.0m in cash offsetting this, leading to net debt of about US$4.98b.
How Strong Is Campbell Soup’s Balance Sheet?
The latest balance sheet data shows that Campbell Soup had liabilities of US$1.98b due within a year, and liabilities of US$6.76b falling due after that. Offsetting these obligations, it had cash of US$209.0m as well as receivables valued at US$580.0m due within 12 months. So it has liabilities totalling US$7.95b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Campbell Soup has a huge market capitalization of US$13.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Campbell Soup has a debt to EBITDA ratio of 3.0 and its EBIT covered its interest expense 6.1 times. Taken together this implies that, while we wouldn’t want to see debt levels rise, we think it can handle its current leverage. Campbell Soup grew its EBIT by 9.8% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Campbell Soup’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Campbell Soup recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we’d usually expect. That puts it in a very strong position to pay down debt.
On our analysis Campbell Soup’s conversion of EBIT to free cash flow should signal that it won’t have too much trouble with its debt. However, our other observations weren’t so heartening. For instance it seems like it has to struggle a bit handle its debt, based on its EBITDA,. When we consider all the elements mentioned above, it seems to us that Campbell Soup is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 1 warning sign for Campbell Soup that you should be aware of.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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