U.S. Markets open in 4 hrs 1 min
  • S&P Futures

    4,163.50
    +1.00 (+0.02%)
     
  • Dow Futures

    33,933.00
    +10.00 (+0.03%)
     
  • Nasdaq Futures

    14,014.25
    +0.25 (+0.00%)
     
  • Russell 2000 Futures

    2,257.20
    +1.50 (+0.07%)
     
  • Crude Oil

    63.37
    -0.09 (-0.14%)
     
  • Gold

    1,764.90
    -1.90 (-0.11%)
     
  • Silver

    25.92
    -0.04 (-0.17%)
     
  • EUR/USD

    1.1973
    -0.0003 (-0.0240%)
     
  • 10-Yr Bond

    1.5300
    -0.1080 (-6.59%)
     
  • Vix

    16.57
    -0.42 (-2.47%)
     
  • GBP/USD

    1.3784
    -0.0001 (-0.0041%)
     
  • USD/JPY

    108.6920
    -0.0240 (-0.0221%)
     
  • BTC-USD

    61,056.01
    -1,731.00 (-2.76%)
     
  • CMC Crypto 200

    1,397.85
    +16.90 (+1.22%)
     
  • FTSE 100

    6,983.50
    +43.92 (+0.63%)
     
  • Nikkei 225

    29,642.69
    +21.70 (+0.07%)
     

La-Z-Boy (NYSE:LZB) Has A Rock Solid Balance Sheet

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that La-Z-Boy Incorporated (NYSE:LZB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for La-Z-Boy

What Is La-Z-Boy's Debt?

As you can see below, at the end of July 2020, La-Z-Boy had US$50.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$346.0m in cash, leading to a US$296.0m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is La-Z-Boy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that La-Z-Boy had liabilities of US$424.5m due within 12 months and liabilities of US$364.2m due beyond that. Offsetting this, it had US$346.0m in cash and US$137.1m in receivables that were due within 12 months. So its liabilities total US$305.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because La-Z-Boy is worth US$1.45b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, La-Z-Boy also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that La-Z-Boy grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if La-Z-Boy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While La-Z-Boy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, La-Z-Boy generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While La-Z-Boy does have more liabilities than liquid assets, it also has net cash of US$296.0m. And it impressed us with free cash flow of US$208m, being 95% of its EBIT. So we don't think La-Z-Boy's use of debt is risky. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for La-Z-Boy you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.