Home Consumer debt Is Prestige Consumer Healthcare (NYSE: PBH) a risky investment?

Is Prestige Consumer Healthcare (NYSE: PBH) a risky investment?


Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Prestige Consumer Health Inc. (NYSE: PBH) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels together.

What is Prestige Consumer Healthcare’s net debt?

As you can see below, Prestige Consumer Healthcare had US $ 1.48 billion in debt in March 2021, up from US $ 1.74 billion the year before. On the other hand, it has $ 32.3 million in cash, resulting in net debt of around $ 1.45 billion.

NYSE: PBH Debt to Equity History June 7, 2021

A look at the responsibilities of Prestige Consumer Healthcare

According to the latest published balance sheet, Prestige Consumer Healthcare had a liability of US $ 122.1 million due within 12 months and a liability of US $ 1.95 billion due beyond 12 months. In compensation for these obligations, it had cash of US $ 32.3 million as well as receivables valued at US $ 114.7 million within 12 months. It therefore has liabilities totaling US $ 1.92 billion more than its cash and short-term receivables combined.

This is a mountain of leverage compared to its market capitalization of US $ 2.50 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.

We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Prestige Consumer Healthcare’s debt is 4.4 times its EBITDA and its EBIT covers its interest expense 3.6 times. This suggests that while debt levels are significant, we would stop calling them problematic. Fortunately, Prestige Consumer Healthcare has increased its EBIT by 2.1% over the past year, slowly reducing its debt to earnings. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Prestige Consumer Healthcare’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Prestige Consumer Healthcare has generated strong free cash flow equivalent to 67% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

Neither Prestige Consumer Healthcare’s ability to manage its debt, based on its EBITDA, nor its interest coverage gave us confidence in its ability to take on more debt. But the good news is that it seems to be able to easily convert EBIT into free cash flow. Taking the above factors together, we believe that Prestige Consumer Healthcare’s debt presents certain risks to the business. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example – Prestige Consumer Healthcare has 1 warning sign we think you should be aware.

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

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