Is Fisher & Paykel Healthcare (NZSE:FPH) A Risky Investment?

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.' 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, Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fisher & Paykel Healthcare

How Much Debt Does Fisher & Paykel Healthcare Carry?

You can click the graphic below for the historical numbers, but it shows that Fisher & Paykel Healthcare had NZ$76.1m of debt in March 2021, down from NZ$104.9m, one year before. However, its balance sheet shows it holds NZ$377.6m in cash, so it actually has NZ$301.5m net cash.

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

The latest balance sheet data shows that Fisher & Paykel Healthcare had liabilities of NZ$427.5m due within a year, and liabilities of NZ$126.6m falling due after that. Offsetting this, it had NZ$377.6m in cash and NZ$228.9m in receivables that were due within 12 months. So it can boast NZ$52.4m more liquid assets than total liabilities.

Having regard to Fisher & Paykel Healthcare's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NZ$18.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Fisher & Paykel Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Fisher & Paykel Healthcare grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fisher & Paykel Healthcare 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Fisher & Paykel Healthcare produced sturdy free cash flow equating to 51% 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 it is always sensible to investigate a company's debt, in this case Fisher & Paykel Healthcare has NZ$301.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 88% year-on-year EBIT growth. So is Fisher & Paykel Healthcare's debt a risk? It doesn't seem so to us. We'd be very excited to see if Fisher & Paykel Healthcare insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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