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Does Henry Schein (NASDAQ:HSIC) Have A Healthy Balance Sheet?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Henry Schein, Inc. (NASDAQ:HSIC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Henry Schein
How Much Debt Does Henry Schein Carry?
As you can see below, at the end of March 2022, Henry Schein had US$859.0m of debt, up from US$679.7m a year ago. Click the image for more detail. However, it does have US$126.0m in cash offsetting this, leading to net debt of about US$733.0m.
A Look At Henry Schein's Liabilities
According to the last reported balance sheet, Henry Schein had liabilities of US$2.14b due within 12 months, and liabilities of US$1.47b due beyond 12 months. Offsetting these obligations, it had cash of US$126.0m as well as receivables valued at US$1.44b due within 12 months. So it has liabilities totalling US$2.04b more than its cash and near-term receivables, combined.
Since publicly traded Henry Schein shares are worth a very impressive total of US$10.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Henry Schein has a low net debt to EBITDA ratio of only 0.68. And its EBIT covers its interest expense a whopping 38.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that Henry Schein has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Henry Schein'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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Henry Schein generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Our View
The good news is that Henry Schein's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It's also worth noting that Henry Schein is in the Healthcare industry, which is often considered to be quite defensive. We think Henry Schein is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Henry Schein that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
About NasdaqGS:HSIC
Henry Schein
Provides health care products and services to dental practitioners, laboratories, physician practices, and ambulatory surgery centers, government, institutional health care clinics, and other alternate care clinics worldwide.
Reasonable growth potential with adequate balance sheet.