Does Graco (NYSE:GGG) Have A Healthy Balance Sheet?
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. We note that Graco Inc. (NYSE:GGG) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Graco
How Much Debt Does Graco Carry?
You can click the graphic below for the historical numbers, but it shows that Graco had US$200.3m of debt in September 2021, down from US$319.0m, one year before. But on the other hand it also has US$603.8m in cash, leading to a US$403.5m net cash position.
How Strong Is Graco's Balance Sheet?
The latest balance sheet data shows that Graco had liabilities of US$427.2m due within a year, and liabilities of US$385.8m falling due after that. On the other hand, it had cash of US$603.8m and US$324.3m worth of receivables due within a year. So it can boast US$115.1m more liquid assets than total liabilities.
This state of affairs indicates that Graco's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$12.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Graco boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Graco has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Graco's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Graco has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Graco produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Graco has net cash of US$403.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 31% year-on-year EBIT growth. So we don't think Graco's use of debt is risky. Another factor that would give us confidence in Graco would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
