Stock Analysis

Graco (NYSE:GGG) Has A Pretty Healthy Balance Sheet

NYSE:GGG
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Graco Inc. (NYSE:GGG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Graco

What Is Graco's Debt?

As you can see below, Graco had US$130.5m of debt at July 2022, down from US$163.1m a year prior. However, it does have US$413.4m in cash offsetting this, leading to net cash of US$282.8m.

debt-equity-history-analysis
NYSE:GGG Debt to Equity History October 8th 2022

A Look At Graco's Liabilities

Zooming in on the latest balance sheet data, we can see that Graco had liabilities of US$424.1m due within 12 months and liabilities of US$222.9m due beyond that. Offsetting these obligations, it had cash of US$413.4m as well as receivables valued at US$373.1m due within 12 months. So it actually has US$139.5m more liquid assets than total liabilities.

Having regard to Graco's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$10.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Graco has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Graco has increased its EBIT by 4.0% over twelve months, which should ease any concerns about debt repayment. 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 Graco 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. 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. Over the most recent three years, Graco recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Graco has net cash of US$282.8m, as well as more liquid assets than liabilities. So we don't think Graco's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Graco's earnings per share history for free.

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.

Valuation is complex, but we're helping make it simple.

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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.