David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, IDEXX Laboratories, Inc. (NASDAQ:IDXX) does carry debt. But is this debt a concern to shareholders?
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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 IDEXX Laboratories's Debt?
As you can see below, IDEXX Laboratories had US$903.7m of debt at March 2021, down from US$1.18b a year prior. However, it does have US$351.2m in cash offsetting this, leading to net debt of about US$552.6m.
How Healthy Is IDEXX Laboratories' Balance Sheet?
We can see from the most recent balance sheet that IDEXX Laboratories had liabilities of US$620.7m falling due within a year, and liabilities of US$1.00b due beyond that. On the other hand, it had cash of US$351.2m and US$423.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$849.7m.
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$56.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, IDEXX Laboratories has virtually no net debt, so it's fair to say it does not have a heavy debt load!
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.
IDEXX Laboratories's net debt is only 0.62 times its EBITDA. And its EBIT covers its interest expense a whopping 24.5 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 IDEXX Laboratories has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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, IDEXX Laboratories produced sturdy free cash flow equating to 64% 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.
Happily, IDEXX Laboratories's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! We would also note that Medical Equipment industry companies like IDEXX Laboratories commonly do use debt without problems. It looks IDEXX Laboratories has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for IDEXX Laboratories you should be aware of.
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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What are the risks and opportunities for IDEXX Laboratories?
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IDEXX Laboratories, Inc. develops, manufactures, and distributes products and services primarily for the companion animal veterinary, livestock and poultry, dairy, and water testing markets worldwide.
Adequate balance sheet with moderate growth potential.