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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Waste Connections, Inc. (NYSE:WCN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Waste Connections
What Is Waste Connections's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2022 Waste Connections had US$6.22b of debt, an increase on US$4.95b, over one year. However, it does have US$214.2m in cash offsetting this, leading to net debt of about US$6.00b.
A Look At Waste Connections' Liabilities
We can see from the most recent balance sheet that Waste Connections had liabilities of US$1.38b falling due within a year, and liabilities of US$7.81b due beyond that. On the other hand, it had cash of US$214.2m and US$810.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.16b.
This deficit isn't so bad because Waste Connections is worth a massive US$33.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
With net debt to EBITDA of 2.8 Waste Connections has a fairly noticeable amount of debt. On the plus side, its EBIT was 7.2 times its interest expense, and its net debt to EBITDA, was quite high, at 2.8. We note that Waste Connections grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Waste Connections can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.