Is ASGN (NYSE:ASGN) using too much debt?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies ASGN Incorporated (NYSE: ASGN) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for ASGN

What is ASGN’s debt?

The chart below, which you can click on for more details, shows that ASGN had US$1.03 billion in debt as of September 2021; about the same as the previous year. However, since he has a cash reserve of $679.4 million, his net debt is less, at around $354.1 million.

NYSE: ASGN Debt to Equity History January 14, 2022

A look at ASGN’s responsibilities

Zooming in on the latest balance sheet data, we can see that ASGN had liabilities of US$591.0 million due within 12 months and liabilities of US$1.20 billion due beyond. On the other hand, it had a cash position of 679.4 million dollars and 697.7 million dollars of receivables at less than one year. Thus, its liabilities total $415.0 million more than the combination of its cash and short-term receivables.

Given that ASGN has a market capitalization of US$6.16 billion, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

ASGN has a net debt of just 0.79 times EBITDA, indicating that it is certainly not an imprudent borrower. And this view is supported by strong interest coverage, with EBIT amounting to 9.6 times interest expense over the past year. Another good sign, ASGN was able to increase its EBIT by 24% in twelve months, thus facilitating the repayment of its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ASGN can strengthen its balance sheet over time. 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 pay off its debts; book profits are not enough. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Fortunately for all shareholders, ASGN has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.

Our point of view

The good news is that ASGN’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. Given this set of factors, it seems to us that ASGN is quite cautious with its debt, and the risks seem well controlled. So we are not worried about using a little leverage on the balance sheet. 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 outside of the balance sheet. To this end, you should be aware of the 1 warning sign we spotted with ASGN.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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John A. Bogar