Globus Medical (NYSE:GMED) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Globus Medical, Inc. (NYSE:GMED) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Globus Medical

How Much Debt Does Globus Medical Carry?

As you can see below, at the end of December 2023, Globus Medical had US$417.4m of debt, up from none a year ago. Click the image for more detail. But it also has US$517.8m in cash to offset that, meaning it has US$100.4m net cash.

How Strong Is Globus Medical's Balance Sheet?

We can see from the most recent balance sheet that Globus Medical had liabilities of US$392.3m falling due within a year, and liabilities of US$695.8m due beyond that. On the other hand, it had cash of US$517.8m and US$504.9m worth of receivables due within a year. So it has liabilities totalling US$65.5m more than its cash and near-term receivables, combined.

Having regard to Globus Medical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$7.04b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Globus Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Globus Medical grew its EBIT by 16% last year, making its debt load easier to handle. 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 Globus Medical 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Globus Medical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Globus Medical produced sturdy free cash flow equating to 69% 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.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Globus Medical has US$100.4m in net cash. And it impressed us with free cash flow of US$165m, being 69% of its EBIT. So is Globus Medical's debt a risk? It doesn't seem so to us. 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. We've identified 3 warning signs with Globus Medical , and understanding them should be part of your investment process.

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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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.