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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies ICU Medical, Inc. (NASDAQ:ICUI) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is ICU Medical's Net Debt?
As you can see below, at the end of June 2020, ICU Medical had US$150.0m of debt, up from none a year ago. Click the image for more detail. However, it does have US$462.0m in cash offsetting this, leading to net cash of US$312.0m.
How Strong Is ICU Medical's Balance Sheet?
The latest balance sheet data shows that ICU Medical had liabilities of US$359.2m due within a year, and liabilities of US$88.1m falling due after that. On the other hand, it had cash of US$462.0m and US$201.8m worth of receivables due within a year. So it actually has US$216.5m more liquid assets than total liabilities.
This short term liquidity is a sign that ICU Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ICU Medical has more cash than debt is arguably a good indication that it can manage its debt safely.
But the other side of the story is that ICU Medical saw its EBIT decline by 5.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ICU Medical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ICU Medical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, ICU Medical's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that ICU Medical has net cash of US$312.0m, as well as more liquid assets than liabilities. So we don't have any problem with ICU Medical's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - ICU Medical has 2 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
This article by Simply Wall St is general in nature. 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.
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