These 4 metrics indicate that Harley-Davidson (NYSE:HOG) is using its debt reasonably well

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. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Harley-Davidson, Inc. (NYSE:HOG) uses debt in its operations. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Harley-Davidson

What is Harley-Davidson’s debt?

The image below, which you can click on for more details, shows Harley-Davidson had $6.89 billion in debt at the end of December 2021, a reduction from $8.99 billion year-over-year . On the other hand, it has $1.08 billion in cash, resulting in a net debt of around $5.81 billion.

NYSE:HOG Debt to Equity April 20, 2022

How healthy is Harley-Davidson’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Harley-Davidson had liabilities of US$3.34 billion due within 12 months and liabilities of US$5.15 billion due beyond. On the other hand, it had a cash position of 1.08 billion dollars and 182.1 million dollars of receivables at less than one year. It therefore has liabilities totaling $7.24 billion more than its cash and short-term receivables, combined.

Given that this deficit is actually greater than the company’s market capitalization of $6.18 billion, we think shareholders really should be watching Harley-Davidson’s debt levels, like a parent watching their child. riding a bike for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

In this case, Harley-Davidson has a rather concerning net debt to EBITDA ratio of 5.8 but a very strong interest coverage of 34.5. Either he has access to very cheap long-term debt, or his interest costs will increase! Fortunately, Harley-Davidson is growing its EBIT faster than former Australian Prime Minister Bob Hawke dropped a yard glass, with a 509% gain over the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Harley-Davidson 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, while the taxman may love accounting profits, lenders only accept cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Harley-Davidson has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

Harley-Davidson’s ability to cover its interest expense with its EBIT and its conversion of EBIT to free cash flow has given us comfort in its ability to manage its debt. But truth be told, its net debt to EBITDA had us biting our nails. Given this range of data points, we believe Harley-Davidson is in a good position to manage its level of debt. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. 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. Know that Harley-Davidson shows 3 warning signs in our investment analysis and 1 of them is potentially serious…

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

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