Summary: Warren Buffett famously said, “Volatility is far from synonymous with risk.” While it’s natural to consider a company’s balance sheet to assess its riskiness, it’s important to understand how debt factors into this equation. IDEXX Laboratories, Inc. (NASDAQ:IDXX) does utilize debt in its business operations, but is this debt a concern for shareholders?
Debt can be a useful tool for business growth, but it can also become dangerous if the company is unable to repay its lenders. In extreme cases, lenders can take control of the business. A more common scenario is when a company is forced to dilute shareholders by issuing shares at a lower price in order to manage its debt. However, debt can also be advantageous as it often represents cheap capital and can be used to reinvest at high rates of return.
To evaluate how much debt a business uses, it’s important to consider both its cash position and debt. IDEXX Laboratories had $1.04 billion of debt in June 2023, slightly lower than the $1.38 billion it had one year prior. However, the company also had $132.8 million in cash, resulting in net debt of approximately $905.7 million.
Looking at IDEXX Laboratories’ balance sheet, it had liabilities of $883.9 million due within a year, and $893.1 million due after that. In comparison, the company had $132.8 million in cash and $532.3 million in receivables due within 12 months. This means that its liabilities outweigh the sum of its cash and receivables by $1.11 billion.
Despite these numbers, IDEXX Laboratories has a market capitalization of $36.3 billion, which makes it unlikely that these liabilities pose a significant threat. Nonetheless, it’s essential to monitor the strength of the company’s balance sheet over time.
When looking at debt levels relative to earnings, two key ratios are considered. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is the ratio of earnings before interest and tax (EBIT) to interest expense (interest cover). In IDEXX Laboratories’ case, its net debt is only 0.78 times its EBITDA, and its EBIT is 22.4 times the size of its interest expense. This indicates that the company is not significantly threatened by its debt.
Another positive sign is that IDEXX Laboratories has experienced a 23% increase in EBIT over the past 12 months, which makes it easier for the company to repay its debt.
While analyzing debt levels, the balance sheet is an important starting point. However, future earnings will ultimately determine IDEXX Laboratories’ ability to maintain a healthy balance sheet going forward. Additionally, a company can only repay its debt with cash flow, not accounting profits. Fortunately, IDEXX Laboratories has produced strong free cash flow equating to 62% of its EBIT over the last three years, indicating its ability to reduce its debt when necessary.
In conclusion, IDEXX Laboratories’ interest cover and EBIT growth rate suggest that it can handle its debt with ease. The company also exhibits prudence in managing its debt, which contributes to a healthy balance sheet. While it’s important to consider the balance sheet, it’s also crucial to recognize that investment risk extends beyond this financial aspect.
Source: Simply Wall St.
Note: This article does not provide financial advice. It is based on historical data and analyst forecasts using an unbiased methodology. The analysis may not include the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Definitions:
1. Debt: Money borrowed by a company or individual that is required to be paid back with interest within a specified period.
2. Balance sheet: A financial statement that provides a snapshot of a company’s financial position by showing its assets, liabilities, and shareholders’ equity at a specific point in time.
3. Shareholders: Individuals or entities that own shares of a company’s stock and therefore have an ownership interest in the company.
4. EBITDA: Earnings before interest, tax, depreciation, and amortization. It represents a company’s operating profit before accounting for interest, taxes, and non-cash expenses.
5. EBIT: Earnings before interest and tax. It represents a company’s operating profit before accounting for interest and taxes.
6. Interest expense: The cost of borrowing money, typically expressed as a percentage of the loan amount.
7. Free cash flow: The cash a company generates after deducting its operating expenses and capital expenditures.
8. Net debt: The total borrowings of a company minus its cash and cash equivalents.
Source: Simply Wall St