Carl Zeiss Meditec (ETR:AFX) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Carl Zeiss Meditec AG (ETR:AFX) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Carl Zeiss Meditec

How Much Debt Does Carl Zeiss Meditec Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Carl Zeiss Meditec had debt of €127.9m, up from €121.3m in one year. However, it does have €7.73m in cash offsetting this, leading to net debt of about €120.2m.

How Strong Is Carl Zeiss Meditec's Balance Sheet?

We can see from the most recent balance sheet that Carl Zeiss Meditec had liabilities of €539.3m falling due within a year, and liabilities of €253.4m due beyond that. Offsetting this, it had €7.73m in cash and €1.37b in receivables that were due within 12 months. So it can boast €580.3m more liquid assets than total liabilities.

This surplus suggests that Carl Zeiss Meditec has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Carl Zeiss Meditec has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Carl Zeiss Meditec has a low debt to EBITDA ratio of only 0.29. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. Fortunately, Carl Zeiss Meditec grew its EBIT by 4.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Carl Zeiss Meditec 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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Carl Zeiss Meditec produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Carl Zeiss Meditec's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! We would also note that Medical Equipment industry companies like Carl Zeiss Meditec commonly do use debt without problems. Zooming out, Carl Zeiss Meditec seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. Over time, share prices tend to follow earnings per share, so if you're interested in Carl Zeiss Meditec, you may well want to click here to check an interactive graph of its earnings per share history.

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.