Yahoo Finance Is Mueller Industries (NYSE:MLI) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Mueller Industries, Inc. (NYSE:MLI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Mueller Industries
What Is Mueller Industries's Debt?
The image below, which you can click on for greater detail, shows that Mueller Industries had debt of US$2.24m at the end of June 2022, a reduction from US$357.4m over a year. However, its balance sheet shows it holds US$202.5m in cash, so it actually has US$200.3m net cash.
How Strong Is Mueller Industries' Balance Sheet?
We can see from the most recent balance sheet that Mueller Industries had liabilities of US$418.8m falling due within a year, and liabilities of US$82.6m due beyond that. On the other hand, it had cash of US$202.5m and US$611.6m worth of receivables due within a year. So it actually has US$312.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Mueller Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mueller Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Mueller Industries grew its EBIT by 117% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mueller Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mueller Industries 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. During the last three years, Mueller Industries produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While it is always sensible to investigate a company's debt, in this case Mueller Industries has US$200.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 117% over the last year. So is Mueller Industries's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Mueller Industries , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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