These 4 Measures Indicate That GCP Applied Technologies (NYSE:GCP) Is Using Debt Reasonably Well
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, GCP Applied Technologies Inc. (NYSE:GCP) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is GCP Applied Technologies's Net Debt?
As you can see below, GCP Applied Technologies had US$351.3m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$488.9m in cash offsetting this, leading to net cash of US$137.6m.
A Look At GCP Applied Technologies' Liabilities
According to the last reported balance sheet, GCP Applied Technologies had liabilities of US$233.7m due within 12 months, and liabilities of US$535.8m due beyond 12 months. On the other hand, it had cash of US$488.9m and US$167.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$112.9m.
Given GCP Applied Technologies has a market capitalization of US$1.77b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, GCP Applied Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also relevant is that GCP Applied Technologies has grown its EBIT by a very respectable 25% in the last year, thus enhancing its ability to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GCP Applied Technologies can strengthen its balance sheet over time. 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. While GCP Applied Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, GCP Applied Technologies recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that GCP Applied Technologies has US$137.6m in net cash. And we liked the look of last year's 25% year-on-year EBIT growth. So we don't have any problem with GCP Applied Technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for GCP Applied Technologies you should know about.
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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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