Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies W.W. Grainger, Inc. (NYSE:GWW) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for W.W. Grainger

How Much Debt Does W.W. Grainger Carry?

The chart below, which you can click on for greater detail, shows that W.W. Grainger had US$2.30b in debt in June 2024; about the same as the year before. On the flip side, it has US$769.0m in cash leading to net debt of about US$1.53b.

A Look At W.W. Grainger's Liabilities

According to the last reported balance sheet, W.W. Grainger had liabilities of US$2.40b due within 12 months, and liabilities of US$2.37b due beyond 12 months. Offsetting this, it had US$769.0m in cash and US$2.34b in receivables that were due within 12 months. So its liabilities total US$1.65b more than the combination of its cash and short-term receivables.

Since publicly traded W.W. Grainger shares are worth a very impressive total of US$47.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

W.W. Grainger has a low net debt to EBITDA ratio of only 0.54. And its EBIT covers its interest expense a whopping 30.1 times over. So we're pretty relaxed about its super-conservative use of debt. The good news is that W.W. Grainger has increased its EBIT by 3.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if W.W. Grainger can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.