Here's Why Fisher & Paykel Healthcare (NZSE:FPH) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Fisher & Paykel Healthcare

What Is Fisher & Paykel Healthcare's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Fisher & Paykel Healthcare had debt of NZ$83.3m, up from NZ$68.3m in one year. But on the other hand it also has NZ$121.5m in cash, leading to a NZ$38.2m net cash position.

How Strong Is Fisher & Paykel Healthcare's Balance Sheet?

According to the last reported balance sheet, Fisher & Paykel Healthcare had liabilities of NZ$289.8m due within 12 months, and liabilities of NZ$161.3m due beyond 12 months. Offsetting this, it had NZ$121.5m in cash and NZ$254.2m in receivables that were due within 12 months. So its liabilities total NZ$75.4m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Fisher & Paykel Healthcare's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NZ$14.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Fisher & Paykel Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Fisher & Paykel Healthcare's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Fisher & Paykel Healthcare 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fisher & Paykel Healthcare 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. Looking at the most recent three years, Fisher & Paykel Healthcare recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fisher & Paykel Healthcare has NZ$38.2m in net cash. So we don't have any problem with Fisher & Paykel Healthcare's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Fisher & Paykel Healthcare insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

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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.