IDEXX Laboratories (NASDAQ:IDXX) Seems To Use Debt Quite Sensibly
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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, IDEXX Laboratories, Inc. (NASDAQ:IDXX) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
View our latest analysis for IDEXX Laboratories
What Is IDEXX Laboratories's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2022 IDEXX Laboratories had US$1.35b of debt, an increase on US$923.7m, over one year. However, it does have US$112.5m in cash offsetting this, leading to net debt of about US$1.24b.
How Healthy Is IDEXX Laboratories' Balance Sheet?
The latest balance sheet data shows that IDEXX Laboratories had liabilities of US$1.24b due within a year, and liabilities of US$902.2m falling due after that. On the other hand, it had cash of US$112.5m and US$490.9m worth of receivables due within a year. So its liabilities total US$1.53b more than the combination of its cash and short-term receivables.
Since publicly traded IDEXX Laboratories shares are worth a very impressive total of US$41.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
IDEXX Laboratories's net debt is only 1.2 times its EBITDA. And its EBIT easily covers its interest expense, being 23.2 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the other side of the story is that IDEXX Laboratories saw its EBIT decline by 3.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IDEXX Laboratories can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, IDEXX Laboratories produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
IDEXX Laboratories's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its EBIT growth rate. It's also worth noting that IDEXX Laboratories is in the Medical Equipment industry, which is often considered to be quite defensive. Taking all this data into account, it seems to us that IDEXX Laboratories takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - IDEXX Laboratories has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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