Does Graco (NYSE:GGG) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Graco Inc. (NYSE:GGG) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Graco

What Is Graco's Net Debt?

The image below, which you can click on for greater detail, shows that Graco had debt of US$30.0m at the end of June 2024, a reduction from US$124.1m over a year. But it also has US$666.0m in cash to offset that, meaning it has US$636.0m net cash.

How Healthy Is Graco's Balance Sheet?

The latest balance sheet data shows that Graco had liabilities of US$362.3m due within a year, and liabilities of US$99.1m falling due after that. Offsetting this, it had US$666.0m in cash and US$350.6m in receivables that were due within 12 months. So it actually has US$555.2m more liquid assets than total liabilities.

This surplus suggests that Graco has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Graco has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Graco saw its EBIT drop by 4.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Graco'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Graco 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. During the last three years, Graco produced sturdy free cash flow equating to 57% 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 Graco has US$636.0m in net cash and a decent-looking balance sheet. So we are not troubled with Graco's debt use. We'd be motivated to research the stock further if we found out that Graco insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.