Graco (NYSE:GGG) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Graco Inc. (NYSE:GGG) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Graco's Net Debt?

The image below, which you can click on for greater detail, shows that Graco had debt of US$28.2m at the end of June 2025, a reduction from US$30.0m over a year. But on the other hand it also has US$534.9m in cash, leading to a US$506.8m net cash position.

How Strong Is Graco's Balance Sheet?

According to the last reported balance sheet, Graco had liabilities of US$388.6m due within 12 months, and liabilities of US$156.5m due beyond 12 months. On the other hand, it had cash of US$534.9m and US$387.2m worth of receivables due within a year. So it actually has US$377.0m 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!

See our latest analysis for Graco

Graco's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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'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 79% 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 we empathize with investors who find debt concerning, you should keep in mind that Graco has net cash of US$506.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$608m, being 79% of its EBIT. So is Graco's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Graco, you may well want to click here to check an interactive graph of its earnings per share history.

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.