Home Factor company Risks and Debt Structure at Lowe’s (NYSE: LOW)

Risks and Debt Structure at Lowe’s (NYSE: LOW)


This article was originally published on Simply Wall Street News

Lowe Enterprises, Inc. (NYSE: LOW) gained a good 44% in the space of a year. The latest earnings report brought Lowe’s some US $ 6.9 billion in year-over-year net earnings, representing annual earnings growth of 22.6%. Analysts also estimate revenue and profit growth going forward. However, there are some risks to the business, and we’ll look at that in our article today.

Lowe’s strategy is to serve both consumers and professional clients in the home improvement industry. The company is pushing an omnichannel approach and strengthening its connection with professionals who offer renovation services, as well as their online presence. The company estimates be in a US $ 900 billion growing industry, which would put their revenues around a 10.5% market share.

Lowe’s most important competitors for market share, are small, micro and service companies, as well as the giant Amazon (NASDAQ: AMZN).


On the competition side, Lowe’s is doing its best to differentiate itself from the products Amazon offers to consumers and professionals. Considering that they have managed to stay afloat after Amazon drove many retailers out of business, it seems likely that there is a mix of products and services that generates value for Lowe’s.

Before examining the fundamental risks associated with debt, note that while the company’s new strategy appears to be working to increase sales, it stands to reason that Lowe’s has benefited from a cyclical wave of enthusiasm for home improvement which started in 2020. In addition, this enthusiasm is supported by the rising real estate prices, which entice sellers to fix homes they want to sell, while deterring buyers from looking for new homes and redirecting them to fix what they currently have. In addition, the price of raw materials, such as drink, may also have contributed to the final turnover, which is not the result of growth, but of inflation.

Debt Analysis

An important factor for the risk in Lowe’s is their indebtedness. We will be looking at both short and long term bonds, to see if Lowe’s might have liquidity issues down the road.

Check out our latest analysis for Lowe’s Companies

You can click on the graph below for historical figures, but it shows that as of July 2021, Lowe’s Companies had debt of US $ 23.8 billion, an increase from US $ 21.2 billion. , over one year.

On the other hand, he has $ 6.26 billion in cash, which net debt of approximately US $ 17.5 billion. This number is large in face value, but can be covered within a few years, as the company’s earnings before interest and taxes are US $ 11.5 billion.



How healthy is Lowe’s corporate balance sheet?

According to the latest published balance sheet, Lowe’s Companies had liabilities of US $ 21.7 billion due within 12 months and liabilities of US $ 27.9 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 6.26 billion as well as receivables valued at US $ 368.0 million due within 12 months.

On a fundamental basis, its liabilities total US $ 43.0 billion more than the combination of its cash and short-term receivables.

This deficit is not that big of a deal as Lowe’s Companies is worth US $ 160.5 billion and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise.

When we look at the company’s ability to service debt over the long term, we use two main ratios to tell us about the levels of debt versus earnings.

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).

Lowe’s Companies net debt is only 1.2 times its EBITDA.

EBIT covers its interest expense 14.6 times more.

On top of that, Lowe’s Companies has increased its EBIT by 42% over the past twelve months, and this growth will make it easier to process its debt.

If we count retail stores and other operating lease obligations as debt, we might want to add some $ 3.8 billion to the debt balance, which should not be overlooked when analyzing the debt burden. a company.

Key points to remember

Lowe’s has a total of short and long term obligations (including operating leases) of approximately US $ 53 billion. While it is true that their financial performance has also increased and that EBIT is up 42%, this could be partly due to a cycle of the economy rather than to the performance of the company. Debt, however, tends to last longer and will contribute to the increased risk of the business as it represents an additional fixed cost.

Businesses use debt to move funds from the future to the present, while charging interest on the debt. Another use is for capital investments, and eventually they take on more debt when they need it.

Lowe is currently stable and can easily service his debt, but we might want to see the performance of the company beyond extraordinary circumstances, in order to have a better picture.

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, we discovered 2 warning signs for Lowe’s Companies (1 cannot be ignored!) Which you should be aware of before investing here.

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

Simply Wall St analyst Goran Damchevski and Simply Wall St have no positions in any of the companies mentioned. This 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.

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