Stock Analysis

Graco (NYSE:GGG) Seems To Use Debt Quite Sensibly

NYSE:GGG
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Graco Inc. (NYSE:GGG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Graco

How Much Debt Does Graco Carry?

You can click the graphic below for the historical numbers, but it shows that Graco had US$124.1m of debt in June 2023, down from US$130.5m, one year before. However, it does have US$520.6m in cash offsetting this, leading to net cash of US$396.5m.

debt-equity-history-analysis
NYSE:GGG Debt to Equity History August 14th 2023

A Look At Graco's Liabilities

The latest balance sheet data shows that Graco had liabilities of US$489.3m due within a year, and liabilities of US$102.1m falling due after that. On the other hand, it had cash of US$520.6m and US$365.8m worth of receivables due within a year. So it can boast US$295.0m 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. Succinctly put, Graco boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Graco grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Graco has US$396.5m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 13% over the last year. 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.

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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Find out whether Graco is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.