Mettler-Toledo International (NYSE:MTD) Seems To Use Debt Rather Sparingly

By
Simply Wall St
Published
April 11, 2022
NYSE:MTD
Source: Shutterstock

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Mettler-Toledo International Inc. (NYSE:MTD) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Mettler-Toledo International

How Much Debt Does Mettler-Toledo International Carry?

The image below, which you can click on for greater detail, shows that at December 2021 Mettler-Toledo International had debt of US$1.68b, up from US$1.34b in one year. On the flip side, it has US$98.6m in cash leading to net debt of about US$1.58b.

debt-equity-history-analysis
NYSE:MTD Debt to Equity History April 11th 2022

How Strong Is Mettler-Toledo International's Balance Sheet?

We can see from the most recent balance sheet that Mettler-Toledo International had liabilities of US$1.15b falling due within a year, and liabilities of US$2.01b due beyond that. On the other hand, it had cash of US$98.6m and US$647.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.41b.

Given Mettler-Toledo International has a humongous market capitalization of US$31.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Mettler-Toledo International has a low net debt to EBITDA ratio of only 1.5. And its EBIT covers its interest expense a whopping 23.3 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 Mettler-Toledo International has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mettler-Toledo International'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Mettler-Toledo International produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Mettler-Toledo International'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 the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Considering this range of factors, it seems to us that Mettler-Toledo International is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Mettler-Toledo International has 2 warning signs we think you should be aware of.

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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