Is Getinge (STO:GETI B) Using Too Much 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. As with many other companies Getinge AB (publ) (STO:GETI B) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Getinge

How Much Debt Does Getinge Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Getinge had kr4.51b of debt, an increase on kr3.28b, over one year. However, it does have kr5.68b in cash offsetting this, leading to net cash of kr1.17b.

How Strong Is Getinge's Balance Sheet?

The latest balance sheet data shows that Getinge had liabilities of kr2.25b due within a year, and liabilities of kr19.3b falling due after that. On the other hand, it had cash of kr5.68b and kr7.20b worth of receivables due within a year. So its liabilities total kr8.71b more than the combination of its cash and short-term receivables.

Given Getinge has a market capitalization of kr70.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Getinge boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Getinge saw its EBIT drop by 9.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Getinge's ability to maintain a healthy balance sheet going forward. 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. Getinge 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. Happily for any shareholders, Getinge actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Getinge does have more liabilities than liquid assets, it also has net cash of kr1.17b. And it impressed us with free cash flow of kr2.2b, being 107% of its EBIT. So we don't think Getinge's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Getinge you should be aware of.

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.