Is Fresh Del Monte Produce (NYSE: FDP) a risky investment?


Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Del Monte Fresh Products Inc. (NYSE: FDP) uses debt. But the most important question is: what risk does this debt create?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest review for Fresh Del Monte Produce

How much debt do Fresh Del Monte products carry?

The image below, which you can click for more details, shows that Fresh Del Monte Produce was in debt of $ 570.9 million at the end of April 2021, a reduction from $ 653.2 million. US dollars over one year. On the other hand, it has $ 26.4 million in cash, resulting in net debt of around $ 544.5 million.

NYSE: Historical FDP Debt to Equity July 9, 2021

How strong is Fresh Del Monte Produce’s balance sheet?

We can see from the most recent balance sheet that Fresh Del Monte Produce had liabilities of US $ 598.7 million due within one year and liabilities of US $ 966.3 million due beyond that. . In return, he had $ 26.4 million in cash and $ 469.6 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 1.07 billion.

This shortfall is sizable compared to its market cap of US $ 1.49 billion, so he suggests shareholders keep an eye on Fresh Del Monte Produce’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.

We measure a company’s debt load relative to 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 costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

Fresh Del Monte Produce’s net debt stands at a very reasonable level of 2.5 times its EBITDA, while its EBIT only covered its interest expense 6.1 times last year. While these numbers don’t worry us, it’s worth noting that the cost of the company’s debt does have a real impact. It should be noted that Fresh Del Monte Produce’s EBIT has soared like bamboo after the rain, gaining 61% in the past twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Fresh Del Monte Produce’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Fresh Del Monte Produce has generated free cash flow of a very solid 84% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.

Our point of view

Fortunately, Fresh Del Monte Produce’s impressive conversion of EBIT to free cash flow means it has the upper hand over its debt. But frankly, we think his total passive level undermines that feeling a bit. All these things considered, it looks like Fresh Del Monte Produce can comfortably manage its current debt levels. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 1 warning sign we spotted with Fresh Del Monte Produce.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. 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. Simply Wall St has no position in the mentioned stocks.
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