Is WESCO International (NYSE:WCC) a risky investment?

External fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, misses this when he says “The biggest investment risk is not price volatility, but whether you will suffer a permanent capital loss.” So it seems the smart money knows that debt — which is usually included in bankruptcies — is a very important factor when assessing how risky a company is. Important, WESCO International, Inc. (NYSE: WCC) carries debt. But is this debt a concern for shareholders?

When is debt a problem?

In general, debt only becomes a real problem when a company cannot pay it off easily, either by raising capital or with its own cash flow. If things go really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it must raise new capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is when a company manages its debt well – and to its advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for WESCO International

What is WESCO International’s net debt?

You can click the chart below for historical numbers, but it shows that as of September 2022, WESCO International had $5.24 billion in debt, an increase of $4.57 billion over the year. However, because it has a cash reserve of $234.1 million, its net debt is less, at about $5.01 billion.

How strong is WESCO International’s balance sheet?

The most recent balance sheet data shows that WESCO International had US$3.57 billion in liabilities due within one year and US$6.32 billion in liabilities due after that. On the other hand, it had cash of $234.1 million and $4.05 billion in receivables due within a year. So it has liabilities totaling $5.61 billion more than its cash and short-term receivables combined.

That’s a mountain of leverage compared to its market capitalization of US$7.40 billion. If its lenders require it to shore up the balance sheet, shareholders are likely to face severe dilution.

We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its interest covers earnings before interest and taxes (EBIT). expense (interest coverage). Thus we consider debt to earnings both with and without depreciation and amortization expense.

WESCO International’s debt is 3.3 times EBITDA and EBIT covers interest expenses 5.3 times. This suggests that while debt levels are substantial, we would not call them problematic. Importantly, WESCO International grew its EBIT by 62% over the past twelve months, and this growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, future business profitability will decide whether WESCO International can strengthen its balance sheet over time. So, if you are focused on the future, you can check this out free report showing analysts’ earnings forecasts.

But our final consideration is also important, because a company cannot pay off debt with paper profits; needs cold hard cash. So it’s worth checking how much of this EBIT is supported by free cash flow. In the last three years, WESCO International generated free cash flows amounting to 4.6% of its EBIT, an uninspiring performance. This poor level of cash conversion impairs his ability to manage and repay debt.

Our point of view

Neither WESCO International’s ability to turn EBIT into free cash flow nor the level of total liabilities gave us confidence in its ability to take on more debt. But its EBIT growth rate tells a very different story and suggests some resilience. We think WESCO International’s debt makes it a little risky after considering the above data points together. This isn’t necessarily a bad thing, as leverage can increase capital returns, but it’s something you should be aware of. There is no doubt that we learn more about debt from the balance sheet. However, not all investment risk lies within the balance sheet – far from it. Be aware that WESCO International is appearing 1 warning sign in our investment analysis you should know about…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then don’t hesitate to find out our exclusive list of net money growing stocks, today.

What are the risks and opportunities? WESCO International?

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This article from 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 into account your financial objectives or situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not include the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in any of the stocks mentioned.