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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Oxford Industries, Inc. (NYSE:OXM) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Oxford Industries
What Is Oxford Industries's Net Debt?
The image below, which you can click on for greater detail, shows that at October 2022 Oxford Industries had debt of US$130.4m, up from none in one year. On the flip side, it has US$15.0m in cash leading to net debt of about US$115.5m.
NYSE:OXM Debt to Equity History January 3rd 2023
A Look At Oxford Industries' Liabilities
We can see from the most recent balance sheet that Oxford Industries had liabilities of US$230.4m falling due within a year, and liabilities of US$376.9m due beyond that. Offsetting these obligations, it had cash of US$15.0m as well as receivables valued at US$84.2m due within 12 months. So its liabilities total US$508.1m more than the combination of its cash and short-term receivables.
Oxford Industries has a market capitalization of US$1.47b, so it could very likely raise cash to ameliorate 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.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Oxford Industries has a low net debt to EBITDA ratio of only 0.45. And its EBIT easily covers its interest expense, being 144 times the size. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Oxford Industries has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Oxford Industries's ability to maintain a healthy balance sheet going forward. 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. So we always check how much of that EBIT is translated into free cash flow. During the last two years, Oxford Industries produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
Happily, Oxford Industries's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Overall, we don't think Oxford Industries is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. 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. For example, we've discovered 2 warning signs for Oxford Industries that you should be aware of before investing here.
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.
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