Is Corning (NYSE: GLW) a risky investment?
Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Corning Incorporated (NYSE: GLW) uses debt. But the more important question is: what risk does this debt create?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Corning
What is Corning’s debt?
You can click on the chart below for historical numbers, but it shows Corning had $6.96 billion in debt in March 2022, up from $7.80 billion a year prior. However, since he has a cash reserve of $2.02 billion, his net debt is less, at around $4.94 billion.
How healthy is Corning’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Corning had liabilities of US$5.06 billion due within 12 months and liabilities of US$12.6 billion due beyond. In return, he had $2.02 billion in cash and $1.91 billion in receivables due within 12 months. Thus, its liabilities total $13.7 billion more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not that bad since Corning has a huge market capitalization of US$28.1 billion, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.
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). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
With net debt of just 1.3 times EBITDA, Corning is arguably quite conservative. And this view is supported by strong interest coverage, with EBIT amounting to 8.3 times interest expense over the past year. On top of that, Corning has grown its EBIT by 33% in the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Corning can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Corning has had free cash flow of 61% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
The good news is that Corning’s demonstrated ability to increase EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a bit concerned about his total passive level. When we consider the range of factors above, it appears that Corning is quite sensitive with its use of debt. While this carries some risk, it can also improve shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 1 warning sign with Corning, and understanding them should be part of your investment process.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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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.