We Think Fisher & Paykel Healthcare (NZSE:FPH) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) does carry debt. But should shareholders be worried about its use of debt?

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. 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, 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.

See 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$66.6m of debt in September 2024, down from NZ$243.2m, one year before. But it also has NZ$116.6m in cash to offset that, meaning it has NZ$50.0m net cash.

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

We can see from the most recent balance sheet that Fisher & Paykel Healthcare had liabilities of NZ$372.9m falling due within a year, and liabilities of NZ$132.7m due beyond that. Offsetting these obligations, it had cash of NZ$116.6m as well as receivables valued at NZ$268.1m due within 12 months. So it has liabilities totalling NZ$120.9m more than its cash and near-term receivables, combined.

Having regard to Fisher & Paykel Healthcare's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NZ$20.6b company is struggling for cash, we still think it's worth monitoring its 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!

Also good is that Fisher & Paykel Healthcare grew its EBIT at 17% over the last year, further increasing its ability to manage 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. Fisher & Paykel Healthcare 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, Fisher & Paykel Healthcare's free cash flow amounted to 36% of its EBIT, less 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$50.0m in net cash. And we liked the look of last year's 17% year-on-year EBIT growth. So is Fisher & Paykel Healthcare's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Fisher & Paykel Healthcare you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.