Is Bausch + Lomb (NYSE:BLCO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Bausch + Lomb Corporation (NYSE:BLCO) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bausch + Lomb

How Much Debt Does Bausch + Lomb Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Bausch + Lomb had US$4.63b of debt, an increase on US$2.63b, over one year. On the flip side, it has US$285.0m in cash leading to net debt of about US$4.35b.

How Strong Is Bausch + Lomb's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bausch + Lomb had liabilities of US$1.68b due within 12 months and liabilities of US$4.99b due beyond that. Offsetting this, it had US$285.0m in cash and US$1.01b in receivables that were due within 12 months. So it has liabilities totalling US$5.38b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$5.57b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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).

Weak interest cover of 0.52 times and a disturbingly high net debt to EBITDA ratio of 7.2 hit our confidence in Bausch + Lomb like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. However, one redeeming factor is that Bausch + Lomb grew its EBIT at 14% over the last 12 months, boosting its ability to handle its 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 Bausch + Lomb'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Bausch + Lomb recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Bausch + Lomb's net debt to EBITDA left us tentative about the stock, and its interest cover was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. We should also note that Medical Equipment industry companies like Bausch + Lomb commonly do use debt without problems. Looking at the bigger picture, it seems clear to us that Bausch + Lomb's use of debt is creating risks for the company. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. In light of our reservations about the company's balance sheet, it seems sensible to check if insiders have been selling shares recently.

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.