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We believe Westinghouse Air Brake Technologies (NYSE:WAB) can keep its debt under control

Some say that volatility, not debt, is the best way to think about risk as an investor, but Warren Buffett once said, “Volatility is far from synonymous with risk.” So it may be obvious that you need to consider debt when thinking about how risky a particular stock is, because too much debt can ruin a company. We can see that Westinghouse Air Brake Technologies Corporation (NYSE:WAB) does indeed use debt in its business. But is this debt a cause for concern for shareholders?

When is debt dangerous?

Debt is a means of helping companies grow, but if a company is unable to repay its lenders, it is at their mercy. If things go really badly, lenders can take control of the company. However, a more common (but still costly) case is that a company must issue shares at bargain prices, permanently diluting shareholders’ ownership, just to shore up its balance sheet. Of course, many companies use debt to fund their growth without negative consequences. When we examine debt levels, we first look at both cash and debt levels together.

Check out our latest analysis for Westinghouse Air Brake Technologies

How much debt does Westinghouse Air Brake Technologies have?

As you can see below, Westinghouse Air Brake Technologies had $4.00 billion in debt as of March 2024, which is about the same as last year. You can click on the chart to see more details. On the other hand, the company has $634.0 million in cash, resulting in net debt of about $3.37 billion.

NYSE:WAB Debt-Equity History July 11, 2024

How healthy is Westinghouse Air Brake Technologies’ balance sheet?

If we take a closer look at the most recent balance sheet data, we can see that Westinghouse Air Brake Technologies had liabilities of US$3.15 billion due within 12 months and liabilities of US$5.09 billion due beyond that. On the other hand, the company had cash of US$634.0 million and receivables of US$1.54 billion due within a year. So liabilities exceed the sum of cash and (near-term) receivables by US$6.07 billion.

While that may seem like a lot, it’s not so bad since Westinghouse Air Brake Technologies has a massive market capitalization of $27.7 billion and could therefore probably strengthen its balance sheet through a capital raise if it needed to. But it’s clear that we should take a close look at whether the company can handle its debt without dilution.

To quantify 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 coverage ratio). The advantage of this approach is that we take into account both the absolute amount of debt (net debt relative to EBITDA) and the actual interest expense associated with that debt (its interest coverage ratio).

Westinghouse Air Brake Technologies’ net debt of 1.7 times EBITDA suggests it handles debt decently. And the fact that its trailing twelve months’ EBIT was 7.1 times interest expense is in line with this theme. It’s worth noting that Westinghouse Air Brake Technologies’ EBIT has been growing like bamboo after the rain, growing 32% over the trailing twelve months. That will make managing debt easier. There’s no doubt that we learn the most about debt from the balance sheet. But it’s future earnings, more than anything, that will determine whether Westinghouse Air Brake Technologies can maintain a healthy balance sheet going forward. So if you’re focused on the future, you can look at this free Report with analysts’ profit forecasts.

After all, a company needs free cash flow to pay off debt; retained earnings simply aren’t enough to do that. So it’s worth checking how much of that EBIT is covered by free cash flow. Over the last three years, Westinghouse Air Brake Technologies generated free cash flow equal to a very solid 81% of its EBIT, more than we would have expected. This puts the company well placed to pay off debt if that becomes desirable.

Our view

The good news is that Westinghouse Air Brake Technologies’ proven ability to convert EBIT to free cash flow makes us as happy as a fluffy puppy makes a toddler. And that’s just the beginning of the good news, because its EBIT growth rate is also very encouraging. When you look closer, Westinghouse Air Brake Technologies appears to be using debt quite sensibly; and that gets our approval. After all, sensible leverage can increase return on equity. There’s no doubt that we learn the most about debt from the balance sheet. But ultimately, every company can contain risks that exist off the balance sheet. For example, Westinghouse Air Brake Technologies has 1 warning sign In our opinion, you should be aware of this.

If you are interested in investing in companies that can grow profits without the burden of debt, check this out free List of growing companies that have net cash on their balance sheet.

Valuation is complex, but we help simplify it.

Find out if Westinghouse Air Brake Technologies may be overvalued or undervalued by reading our comprehensive analysis which includes: Fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View free analysis

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

Valuation is complex, but we help simplify it.

Find out if Westinghouse Air Brake Technologies may be overvalued or undervalued by reading our comprehensive analysis which includes: Fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View free analysis

Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]

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