November 27, 2021

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Remarkable business & finance

Does ITT (NYSE:ITT) Have A Healthy Balance Sheet?

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.’ 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. Importantly, ITT Inc. (NYSE:ITT) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is ITT’s Net Debt?

You can click the graphic below for the historical numbers, but it shows that ITT had US$211.1m of debt in July 2021, down from US$260.3m, one year before. But it also has US$578.8m in cash to offset that, meaning it has US$367.7m net cash.

NYSE:ITT Debt to Equity History September 8th 2021

How Strong Is ITT’s Balance Sheet?

The latest balance sheet data shows that ITT had liabilities of US$900.0m due within a year, and liabilities of US$422.0m falling due after that. Offsetting these obligations, it had cash of US$578.8m as well as receivables valued at US$567.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$175.4m.

Since publicly traded ITT shares are worth a total of US$8.33b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ITT boasts net cash, so it’s fair to say it does not have a heavy debt load!

But the bad news is that ITT has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ITT 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. While ITT 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, ITT produced sturdy free cash flow equating to 57% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about ITT’s liabilities, but we can be reassured by the fact it has has net cash of US$367.7m. So we don’t have any problem with ITT’s use of debt. 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 2 warning signs for ITT you should know about.

If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

https://www.nasdaq.com/articles/does-itt-nyse%3Aitt-have-a-healthy-balance-sheet-2021-09-08