IDEXX Laboratories (NASDAQ:IDXX) Has A Rock Solid 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. Importantly, IDEXX Laboratories, Inc. (NASDAQ:IDXX) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for IDEXX Laboratories

What Is IDEXX Laboratories's Debt?

As you can see below, IDEXX Laboratories had US$947.9m of debt at December 2023, down from US$1.35b a year prior. However, it does have US$453.9m in cash offsetting this, leading to net debt of about US$493.9m.

How Healthy Is IDEXX Laboratories' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IDEXX Laboratories had liabilities of US$951.5m due within 12 months and liabilities of US$823.8m due beyond that. Offsetting this, it had US$453.9m in cash and US$529.5m in receivables that were due within 12 months. So its liabilities total US$791.9m more than the combination of its cash and short-term receivables.

This state of affairs indicates that IDEXX Laboratories' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$43.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, IDEXX Laboratories has a very light debt load indeed.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

IDEXX Laboratories's net debt is only 0.41 times its EBITDA. And its EBIT covers its interest expense a whopping 30.5 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Another good sign is that IDEXX Laboratories has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if IDEXX Laboratories 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.

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. Over the most recent three years, IDEXX Laboratories recorded free cash flow worth 61% 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.

Our View

IDEXX Laboratories's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. We would also note that Medical Equipment industry companies like IDEXX Laboratories commonly do use debt without problems. Overall, we don't think IDEXX Laboratories is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. Another factor that would give us confidence in IDEXX Laboratories would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.