Is Vulcan Materials (NYSE:VMC) Taking On Too Much Debt?

Howard Marks summed it up when he said: “Instead of worrying about the volatility of stock prices, the possibility of permanent loss is the risk I worry about… and every practical investor I know worries about So it seems that smart people know that debt – which usually accompanies bankruptcies – is a very important factor when assessing a company’s risk. We can see that Vulcan Materials Company (NYSE:VMC) uses debt in its business. But is this debt a problem for shareholders?

Why does debt pose risks?

Debt is a tool that helps companies grow. However, if a company is unable to repay its lenders, it is at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While this isn’t all that common, we often see indebted companies permanently diluting their shareholders because lenders force them to raise capital at a distressed price. However, the most common situation is for a company to manage its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for Vulcan Materials

How much is Vulcan Materials’ net debt?

As you can see below, Vulcan Materials had $3.33 billion in debt as of September 2024, down from $3.87 billion the year before. However, the company also had $433.2 million in cash, leaving its net debt at $2.90 billion.

A look at Vulcan Materials’ liabilities

The most recent balance sheet showed that Vulcan Materials had liabilities of US$774.1m due within a year, and liabilities of US$5.68b due beyond that . Offsetting these obligations, it had cash of US$433.2m as well as US$1.02b in receivables due within 12 months. So its liabilities total US$5.01 billion more than the combination of its cash and short-term receivables.

Given that Vulcan Materials’ publicly traded shares have an impressive total value of $38.1 billion, it seems unlikely that this level of liabilities would pose much of a threat. But there are enough liabilities that we would definitely recommend that shareholders keep an eye on the balance sheet in the future.

To measure a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).

Vulcan Materials has net debt of just 1.5 times EBITDA, suggesting it is certainly not a reckless borrower. And this assessment is supported by solid interest coverage: EBIT was 8.8 times interest expense last year. Fortunately, Vulcan Materials was able to grow its EBIT by 7.9% last year, so its debt load looks even more manageable. There is no doubt that the balance sheet is where we learn the most about debt. However, the company’s future profitability will ultimately determine whether Vulcan Materials can strengthen its balance sheet over time. So if you’re focused on the future, you can look at that free Report with analyst profit forecasts.

After all, a company needs free cash flow to pay off debt; Book profits are simply not enough. So we always check how much of that EBIT is converted into free cash flow. Over the last three years, Vulcan Materials recorded free cash flow worth 51% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to pay down debt if necessary.

Our view

Vulcan Materials’ interest coverage suggests that the company can handle its debt as easily as Cristiano Ronaldo could score a goal against a goalkeeper under the age of 14. And we also found that net debt to EBITDA was positive. Taking all of these factors into account, it appears that Vulcan Materials can easily manage its current debt. On the positive side, this leverage can boost shareholder returns, but the potential downside is a higher risk of loss, which is why it’s worth keeping an eye on the balance sheet. We would be motivated to investigate the stock further if we found out that Vulcan Materials insiders have recently purchased shares. If that’s what you want too, then you’re in luck, because today we’re making our list of reported insider transactions available to you for free.

If, after all that, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks immediately.

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