We Think IDEXX Laboratories (NASDAQ:IDXX) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, IDEXX Laboratories, Inc. (NASDAQ:IDXX) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for IDEXX Laboratories

What Is IDEXX Laboratories's Net Debt?

You can click the graphic below for the historical numbers, but it shows that IDEXX Laboratories had US$944.9m of debt in June 2024, down from US$1.04b, one year before. However, it does have US$401.6m in cash offsetting this, leading to net debt of about US$543.3m.

How Strong Is IDEXX Laboratories' Balance Sheet?

According to the last reported balance sheet, IDEXX Laboratories had liabilities of US$1.12b due within 12 months, and liabilities of US$717.9m due beyond 12 months. Offsetting this, it had US$401.6m in cash and US$608.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$824.7m.

Having regard to IDEXX Laboratories' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$42.1b company is short on cash, but still worth keeping an eye on the 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

IDEXX Laboratories has a low net debt to EBITDA ratio of only 0.43. And its EBIT easily covers its interest expense, being 53.9 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that IDEXX Laboratories has increased its EBIT by 9.3% over twelve months, which should ease any concerns about debt repayment. 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 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 we always check how much of that EBIT is translated into 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 cold hard cash means it can reduce its debt when it wants to.

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. It's also worth noting that IDEXX Laboratories is in the Medical Equipment industry, which is often considered to be quite defensive. Looking at the bigger picture, we think IDEXX Laboratories's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Over time, share prices tend to follow earnings per share, so if you're interested in IDEXX Laboratories, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.