Legendary fund manager Li Lu (supported by Charlie Munger) once said, “The biggest investment risk is not price volatility, but whether you will suffer a permanent loss of capital.” It’s only natural to look at a company’s balance sheet when examining how risky it is, since debt is often involved when a company goes down. As with many other companies Univar Solutions Inc. (NYSE: UNVR) is taking advantage of debt. But is this debt a concern for shareholders?

When is debt a problem?

Generally, debt becomes a real problem only when the company cannot pay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal obligations to repay the debt, the shareholders can give up anything. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain low prices, permanently weakening shareholders, just to prop up its balance sheet. By replacing dilution, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step when looking at a company’s debt levels is to consider both liquidity and debt.

Our analysis indicates that UNVR is probably undervalued!

What is Univar Solutions’ net debt?

You can click on the chart below for historical figures, but it shows that as of June 2022, Univar Solutions had $2.43 billion in debt, an increase of $2.29 billion, over a one-year period. However, it has $244.7 million in cash compensation, resulting in a net debt of approximately $2.19 billion.

Analyze the history of debt and equity
NYSE: UNVR Debt to Equity History November 1, 2022

How correct is Univar Solutions’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Univar Solutions has liabilities of $1.71 billion maturing within 12 months and liabilities of $3.08 billion maturing thereafter. On the other hand, it had cash of $244.7 million and $1.82 billion of receivables due within a year. So its total liabilities are $2.73 billion more than the sum of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of $4.25 billion. This indicates that shareholders will dilute heavily if the company needs to shore up its balance sheet quickly.

In order to increase the amount of a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its interest expense (interest cover). In this way, we take into account both the absolute amount of the debt, as well as the interest rates paid on it.

We might say Univar Solutions’ moderate net debt to EBITDA ratio (2.0), indicates wisdom when it comes to debt. Its EBIT of 11.1 times its interest expense suggests that the debt burden is as light as a peacock feather. Gladly, Univar Solutions is growing its EBIT at a faster rate than former Australian Prime Minister Bob Hawke cutting yard glass, achieving a profit of 114% in the past 12 months. There is no doubt that we learn more about debt from the balance sheet. But future earnings, more than anything else, will determine Univar Solutions’ ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you may find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay off debts with paper dividends; He needs cold hard cash. So we always check how much EBIT converts into free cash flow. In the past three years, Univar Solutions’ free cash flow has been 36% of its EBIT, lower than we had anticipated. That’s not great, when it comes to paying down debt.

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Univar Solutions’ ability to grow its EBIT and interest coverage has given us the comfort that it can handle its debt. Having said that, the level of total liabilities is somewhat telling of potential future risks on the balance sheet. When we consider all the above items, it seems to us that Univar Solutions is managing its debt well. Having said that, the burden is heavy enough that we would recommend any contributors to keep a close eye on it. There is no doubt that we learn more about debt from the balance sheet. But in the end, every company can have off-balance sheet risks. For example – Univar Solutions has 2 warning signs We think you should be aware.

When all is said and done, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of developing stocks with zero net debt 100% freeImmediately.

Evaluation is complex, but we help simplify it.

Find out if Univar Solutions potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks, warnings, dividends, insider transactions and financial soundness.

View free analysis

This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations 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, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.

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