These 4 Measures Indicate That Integra LifeSciences Holdings (NASDAQ:IART) Is Using Debt Extensively

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 Integra LifeSciences Holdings Corporation (NASDAQ:IART) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Integra LifeSciences Holdings

What Is Integra LifeSciences Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Integra LifeSciences Holdings had debt of US$1.81b, up from US$1.51b in one year. On the flip side, it has US$277.6m in cash leading to net debt of about US$1.53b.

How Strong Is Integra LifeSciences Holdings' Balance Sheet?

The latest balance sheet data shows that Integra LifeSciences Holdings had liabilities of US$912.6m due within a year, and liabilities of US$1.63b falling due after that. Offsetting these obligations, it had cash of US$277.6m as well as receivables valued at US$256.1m due within 12 months. So its liabilities total US$2.01b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$2.02b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Integra LifeSciences Holdings has a debt to EBITDA ratio of 4.8 and its EBIT covered its interest expense 4.2 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Even worse, Integra LifeSciences Holdings saw its EBIT tank 27% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Integra LifeSciences Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Integra LifeSciences Holdings's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

We'd go so far as to say Integra LifeSciences Holdings's EBIT growth rate was disappointing. But at least its conversion of EBIT to free cash flow is not so bad. We should also note that Medical Equipment industry companies like Integra LifeSciences Holdings commonly do use debt without problems. We're quite clear that we consider Integra LifeSciences Holdings to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Integra LifeSciences Holdings 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.