These 4 Measures Indicate That Thermo Fisher Scientific (NYSE:TMO) Is Using Debt Reasonably Well

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.' 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, Thermo Fisher Scientific Inc. (NYSE:TMO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Thermo Fisher Scientific

How Much Debt Does Thermo Fisher Scientific Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Thermo Fisher Scientific had debt of US$35.2b, up from US$33.8b in one year. On the flip side, it has US$8.82b in cash leading to net debt of about US$26.4b.

How Strong Is Thermo Fisher Scientific's Balance Sheet?

According to the last reported balance sheet, Thermo Fisher Scientific had liabilities of US$14.8b due within 12 months, and liabilities of US$36.2b due beyond 12 months. Offsetting this, it had US$8.82b in cash and US$9.43b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$32.7b.

Given Thermo Fisher Scientific has a humongous market capitalization of US$236.9b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Thermo Fisher Scientific's net debt to EBITDA ratio of about 2.5 suggests only moderate use of debt. And its commanding EBIT of 22.4 times its interest expense, implies the debt load is as light as a peacock feather. Thermo Fisher Scientific grew its EBIT by 2.3% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. 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 Thermo Fisher Scientific 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 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, Thermo Fisher Scientific generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Happily, Thermo Fisher Scientific's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its net debt to EBITDA. When we consider the range of factors above, it looks like Thermo Fisher Scientific is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Thermo Fisher Scientific is showing 2 warning signs in our investment analysis , you should know about...

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.