Getinge (STO:GETI B) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We can see that Getinge AB (publ) (STO:GETI B) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Getinge

What Is Getinge's Net Debt?

As you can see below, Getinge had kr4.10b of debt at June 2022, down from kr4.51b a year prior. But on the other hand it also has kr4.15b in cash, leading to a kr44.0m net cash position.

A Look At Getinge's Liabilities

We can see from the most recent balance sheet that Getinge had liabilities of kr1.96b falling due within a year, and liabilities of kr18.2b due beyond that. Offsetting this, it had kr4.15b in cash and kr6.30b in receivables that were due within 12 months. So its liabilities total kr9.76b more than the combination of its cash and short-term receivables.

Since publicly traded Getinge shares are worth a total of kr52.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Getinge also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Getinge if management cannot prevent a repeat of the 34% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Getinge 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 company can only pay off debt with cold hard cash, not accounting profits. While Getinge 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. Over the last three years, Getinge actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Getinge's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr44.0m. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in kr3.1b. So we are not troubled with Getinge's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Getinge that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.