Wednesday, August 6, 2008

McGraw Hill-Ryerson: Boring but Beautiful

In my last McGraw Hill-Ryerson post here, I wrote some notes about their business and quality of their earnings. Going further, we can look at the quality of their assets and also keep an eye on the debt levels to get a better picture of how risky this investment could be.

From a debt perspective, adding up all the sources of debt including short term liabilities, current portions of debt, long term debt and capitalizing all the off balance liabilities gives a good picture of how indebted a company is. Some debt can be a healthy source of funds for a company but only to a point and you always need to make sure a few "bumps in the road" are not going to derail your company.

With McGraw Hill-Ryerson, their last quarterly report didn't reveal any significant debt on the balance sheet and only a bit of off-balance sheet debt giving a total debt to equity ratio of 6%. That's a very low level of debt leverage in this company and is not a big risk.

The balance sheet assets look clean and reliable with 33% of the stock price in the form of cash, a seemingly reasonable 102 days inventory to supply educational institutions, and no goodwill or intangibles! I especially like no goodwill or intangibles on the books because in my opinion these soft squishy assets are often "writedowns waiting to happen".

To summarize, McGraw Hill-Ryerson has a stable business, a long track record, a consistent demand for their products and has lots of room to take on additional debt if needed. This company keeps chugging along, probably under the radar of a lot of analysts due to their size and the fact they are not in a hot industry. For value investors, companies like this are well worth spending the time valuing and then buying as soon as Mr. Market offers it up at a bargain price.

Disclosure: The author has no shares in this company

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