Home improvement specialist Home Depot (HD 1.69%) is one of the nation's largest retailers, a stalwart by almost any definition. It's also carrying a lot of debt: $37.5 billion in long-term liabilities as of the quarter ending Oct. 29. 2023.
That's a lot -- but simply knowing the amount doesn't tell us if that much debt is good, bad, or indifferent. So let's take a closer look.
How much debt does Home Depot have compared to its peers?
I think "How much debt does Home Depot have" is actually the wrong question. Let me explain.
It's common for businesses to take on debt as they grow larger. The extra capital can come in handy, especially in industries whose spending needs are both predictable and sizable, like oil production or manufacturing.
Many mature businesses can also grow their earnings or cash flow at higher rates than the interest accumulating on their debt. That takes away some of the pressure of paying it back.
Let's compare Home Depot to its main rival, Lowe's (LOW 1.64%), and two other retail giants, Kroger (KR 0.20%) and Target (TGT 1.71%). We'll use interest expense to earnings before interest and taxes (EBIT), which gives us an idea of how much of Home Depot's profit is used to service its debt.
DATA PROVIDED BY S&P GLOBAL MARKET INTELLIGENCE, CHART BY THE MOTLEY FOOL.
Higher is better -- you really want a ratio of 2 or better -- and Home Depot does the best.
Home Depot's performance is especially impressive when you consider its capital needs are much greater than Kroger's or Target's. Its stores generally have a much larger footprint, and its merchandise needs special handling -- how many forklifts have you ever seen at your local supermarket? And with an operating margin of around 15%, it's the most profitable of these four.
Is Home Depot able to manage its debt?
Don't worry too much about Home Depot's debt management ability. Home improvement retail is an expensive business, so the large dollar value of Home Depot's debt isn't concerning. And the company is showing every sign it can keep that debt under control.
