When evaluating a company’s risk, considering its level of debt is crucial. While some argue that risk should be measured by volatility, others believe that debt is a better indicator. Warren Buffett famously said, “Volatility is far from synonymous with risk.” So, how risky is the use of debt by Freeport-McMoRan Inc. (NYSE: FCX)?
At the end of June 2023, Freeport-McMoRan had a total debt of $9.50 billion, a reduction from the previous year’s $11.1 billion. However, it also had $6.68 billion in cash, resulting in a net debt of approximately $2.81 billion.
Analyzing the balance sheet, Freeport-McMoRan had short-term liabilities of $4.79 billion and long-term liabilities of $20.1 billion. Offsetting these obligations, it had $6.68 billion in cash and $1.09 billion in accounts receivable within 12 months. Despite the high amount of liabilities, Freeport-McMoRan has a significant market capitalization of $57.6 billion, meaning it could potentially raise capital to strengthen its balance sheet if needed.
When assessing a company’s debt burden, it is essential to consider its ability to generate earnings and cover its interest expenses. Freeport-McMoRan has a low net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 0.36, indicating that its debt is manageable. Additionally, its EBIT covers its interest expenses 12.1 times, demonstrating that it has sufficient earnings to meet its interest obligations.
However, Freeport-McMoRan’s EBIT has decreased by 40% in the last year, raising concerns about its ability to repay debt in the future. Future earnings will be crucial in determining whether the company can maintain a healthy balance sheet going forward.
It is important to note that a company can only repay its debt with actual cash flow, not just accounting profits. In the case of Freeport-McMoRan, its free cash flow over the past three years represented only 46% of its EBIT, indicating weak cash conversion and making debt management challenging.
Overall, the use of debt by Freeport-McMoRan poses certain risks. While leverage can increase returns on capital, it is essential to consider the company’s ability to generate future earnings and generate enough cash flow to repay its debts. Investors should carefully evaluate these factors before making any investment decisions.
– Simply Wall St
– (email editorial-team (a) simplywallst.com)
– Net Debt: The sum of a company’s short and long-term debt after subtracting its cash and cash equivalents.
– EBITDA: Earnings before interest, taxes, depreciation, and amortization. It measures a company’s operational performance.
– EBIT: Earnings before interest and taxes. It reflects a company’s profitability before accounting for interest and tax expenses.
– Cash Flow: The net amount of cash and cash equivalents that enter and leave a company.
– Market Capitalization: The total value of a company’s outstanding shares in the stock market.