What the Smartest Investors Know About These Stocks

Smart investors know that, more often than not, the rules of home finance aren’t all that much different from corporate finance. That’s on display right now as Wall Street watches several well-known companies each try to navigate some daunting financial challenges.

Food producer B&G Foods (BGS -0.57%) decided to cut its dividend recently as a result of high debt and weak results. Once-high-flying Peloton Interactive (PTON 4.78%) has been struggling ever since the reopening of the global economy. Retailer Bed Bath & Beyond (BBBY -30.15%) is facing such severe challenges now that it could file for bankruptcy protection.

Here’s what all of these companies have in common and three simple things that you need to be monitoring.

Challenges on multiple fronts

From a big picture perspective, retailer Bed Bath & Beyond is having trouble getting people into its stores and buying its wares. That’s a clear issue, but this alone is not enough to send a company spiraling toward bankruptcy protection, which the company recently warned is a very real possibility after it experienced weak sales to close out 2022.

A person on an exercise bike.

Image source: Getty Images.

The deeper problem at Bed Bath & Beyond is found on its balance sheet. Specifically, the company’s debt load has been on the rise, leading to a worryingly high debt-to-equity ratio. Further, it hasn’t been able to cover its interest costs on that debt. The trailing-12-month times-interest-earned ratio — measuring earnings before interest and taxes (EBIT) divided by interest expense — has been negative for roughly four years.

The times-interest-earned ratio effectively shows how well a company is able to pay its interest expenses. A ratio of one means it is just covering its interest costs while lower numbers mean that interest costs aren’t being covered.

BBBY Times Interest Earned (TTM) Chart

BBBY Times Interest Earned (TTM) data by YCharts

If you ran your home finances the same way, it would be a concern, too. The simple logic here is that companies with manageable debt loads tend to navigate ahead much better than those with too much debt.

Peloton’s headwinds

Now, let’s focus on the same charts for Peloton Interactive. Peloton hasn’t been a public company for as long as Bed Bath & Beyond, but the trends here are very similar. Specifically, the company has a rising debt load that leads to a worryingly high debt-to-equity ratio. 

PTON Times Interest Earned (TTM) Chart

PTON Times Interest Earned (TTM) data by YCharts

The fitness products company isn’t profitable, so its trailing-12-month times-interest-earned ratio is negative. Clearly, there are nuances and details to the story here that a few statistics can’t convey.

However, when you look at the company’s leverage and its ability to carry that leverage, there are clear signs that Peloton is in very real financial trouble if it can’t get its business turned around — quickly. The specifics of the company’s story don’t change that takeaway.

Indeed, it doesn’t matter how amazing the company’s products may or may not be. Eventually, bondholders need to be paid. This is not to suggest that debt is bad; it isn’t if you use it wisely. The problem comes when leverage is taken too far. And that looks like a very real risk at Peloton today.

Smart at all times

Now, let’s consider food maker B&G Foods. It isn’t in nearly as dire a financial condition as the others, given that the company’s earnings are positive on an adjusted basis. And, notably, its times-interest-earned ratio is under one but at least still in positive territory.

BGS Times Interest Earned (TTM) Chart

BGS Times Interest Earned (TTM) data by YCharts

That said, B&G Foods had long offered investors a large dividend. And so when the trailing-12-month times-interest-earned ratio fell below 1 in mid-2022, the sanctity of that dividend came into question. One of the quickest ways to increase the amount of cash in the bank is to trim the dividend, which is exactly what the consumer staples company did in the fourth quarter of 2022.

Once again, too much leverage was a key warning sign of the potential risk. 

There are other, harder to see things that can take place, too, like reduced spending on advertising, lowered product quality standards, or a decline in spending on research and development. All are meant to save money but they can also lead to long-term troubles for a company.

Always check the balance sheet

Smart investors make sure to examine a company’s balance sheet before investing. And even after purchase, leverage is an important issue to monitor. The debt-to-equity ratio and times-interest-earned figures aren’t hard to find online and can quickly tell you whether or not you need to dig deeper.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top
%d bloggers like this: