Tri Pointe Homes (NYSE: TPH) has a pretty healthy track record
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Tri Pointe Homes, Inc. (NYSE: TPH) has debt on its balance sheet. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is the debt of Tri Pointe Homes?
The graph below, which you can click for more details, shows Tri Pointe Homes owed US $ 1.34 billion in debt as of September 2021; about the same as the year before. On the other hand, it has $ 587.4 million in cash, resulting in net debt of around $ 756.4 million.
A look at the responsibilities of Tri Pointe Homes
Zooming in on the latest balance sheet data, we can see that Tri Pointe Homes had a liability of US $ 309.8 million owed within 12 months and a liability of US $ 1.57 billion owed beyond that. In return, he had $ 587.4 million in cash and $ 66.6 million in receivables due within 12 months. It therefore has liabilities totaling US $ 1.23 billion more than its cash and short-term receivables combined.
This deficit is not that big as Tri Pointe Homes is worth US $ 2.87 billion, so it could probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization expenses.
Tri Pointe Homes’ net debt is only 1.2 times its EBITDA. And its EBIT easily covers its interest costs, which is 1,000 times the size. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, we are happy to report that Tri Pointe Homes has increased its EBIT by 44%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Tri Pointe Homes’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Fortunately for all shareholders, Tri Pointe Homes has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
The good news is that Tri Pointe Homes’ demonstrated ability to cover their interest costs with their BAII delights us like a fluffy puppy does a toddler. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! Looking at the big picture, we think Tri Pointe Homes’ use of debt seems perfectly reasonable and we are not concerned about that. After all, reasonable leverage can increase returns on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for Tri Pointe houses which you should know before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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