Yahoo Finance We Think Herman Miller (NASDAQ:MLHR) Can Manage Its Debt With Ease
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Herman Miller, Inc. (NASDAQ:MLHR) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Herman Miller
How Much Debt Does Herman Miller Carry?
As you can see below, Herman Miller had US$291.5m of debt at May 2021, down from US$616.3m a year prior. But on the other hand it also has US$404.1m in cash, leading to a US$112.6m net cash position.
How Healthy Is Herman Miller's Balance Sheet?
According to the last reported balance sheet, Herman Miller had liabilities of US$500.8m due within 12 months, and liabilities of US$634.5m due beyond 12 months. On the other hand, it had cash of US$404.1m and US$221.1m worth of receivables due within a year. So it has liabilities totalling US$510.1m more than its cash and near-term receivables, combined.
Since publicly traded Herman Miller shares are worth a total of US$3.22b, it seems unlikely that this level of liabilities would be a major 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, Herman Miller also has more cash than debt, so we're pretty confident it can manage its debt safely.
Another good sign is that Herman Miller has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Herman Miller 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Herman Miller may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Herman Miller generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
Although Herman Miller's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$112.6m. And it impressed us with free cash flow of US$273m, being 86% of its EBIT. So is Herman Miller's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Herman Miller you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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