Does Wolverine World Wide (NYSE:WWW) have a healthy balance sheet?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Wolverine World Wide, Inc. (NYSE:WWW) is in debt. But the more important question is: what risk does this debt create?

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Our analysis indicates that WWW is potentially undervalued!

How Much Debt Does Wolverine World Wide Carry?

As you can see below, at the end of July 2022, Wolverine World Wide had $1.23 billion in debt, up from $718.4 million a year ago. Click on the image for more details. However, he also had $149.3 million in cash, so his net debt is $1.08 billion.

NYSE: WWW Debt to Equity History October 26, 2022

How healthy is Wolverine World Wide’s balance sheet?

We can see from the most recent balance sheet that Wolverine World Wide had liabilities of US$1.09 billion due within a year, and liabilities of US$1.19 billion due beyond . As compensation for these obligations, it had cash of US$149.3 million and receivables valued at US$420.0 million due within 12 months. It therefore has liabilities totaling $1.72 billion more than its cash and short-term receivables, combined.

When you consider that this shortfall exceeds the company’s US$1.36 billion market capitalization, you might well be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Wolverine World Wide has a rather high debt to EBITDA ratio of 6.7, which suggests significant leverage. But the good news is that it has a pretty comforting 3.4x interest coverage, suggesting it can meet its obligations responsibly. Worse still, Wolverine World Wide has seen its EBIT soar 21% in the last 12 months. If earnings continue to follow this trajectory, paying off that debt will be harder than convincing us to run a marathon in the rain. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Wolverine World Wide’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Luckily for all shareholders, Wolverine World Wide has actually produced more free cash flow than EBIT for the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

To be frank, Wolverine World Wide’s net debt to EBITDA ratio and its history of (non-)growth in its EBIT make us rather uncomfortable with its debt levels. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. Overall, it seems to us that Wolverine World Wide’s balance sheet is really a risk for the company. We are therefore almost as wary of this stock as a hungry kitten of falling into its owner’s fish pond: once bitten, twice shy, as they say. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 3 warning signs we spotted with Wolverine World Wide (including 1 that can’t be ignored).

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

Valuation is complex, but we help make it simple.

Find out if Wolverine around the world is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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