David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Fisher & Paykel Healthcare Carry?
You can click the graphic below for the historical numbers, but it shows that Fisher & Paykel Healthcare had NZ$68.3m of debt in March 2022, down from NZ$76.1m, one year before. However, its balance sheet shows it holds NZ$290.0m in cash, so it actually has NZ$221.7m net cash.
How Healthy Is Fisher & Paykel Healthcare's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Fisher & Paykel Healthcare had liabilities of NZ$303.9m due within 12 months and liabilities of NZ$123.4m due beyond that. Offsetting this, it had NZ$290.0m in cash and NZ$182.7m in receivables that were due within 12 months. So it can boast NZ$45.4m more liquid assets than total liabilities.
This state of affairs indicates that Fisher & Paykel Healthcare's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NZ$12.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Fisher & Paykel Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Fisher & Paykel Healthcare's saving grace is its low debt levels, because its EBIT has tanked 29% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fisher & Paykel Healthcare can strengthen its balance sheet over time. 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. While Fisher & Paykel Healthcare has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Fisher & Paykel Healthcare recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Fisher & Paykel Healthcare has net cash of NZ$221.7m, as well as more liquid assets than liabilities. So we don't have any problem with Fisher & Paykel Healthcare's use of debt. 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. For example - Fisher & Paykel Healthcare has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.