Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We note that Zimmer Biomet Holdings, Inc. (NYSE: ZBH) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
How much debt does Zimmer Biomet Holdings have?
As you can see below, Zimmer Biomet Holdings had $ 7.52 billion in debt in September 2021, up from $ 8.31 billion the year before. However, he also had $ 928.6 million in cash, so his net debt is $ 6.59 billion.
NYSE: ZBH Debt to Equity History November 25, 2021
How strong is Zimmer Biomet Holdings’ balance sheet?
We can see from the most recent balance sheet that Zimmer Biomet Holdings had liabilities of US $ 2.94 billion maturing within one year and liabilities of US $ 8.36 billion maturing within one year. of the. In return, he had $ 928.6 million in cash and $ 1.39 billion in receivables due within 12 months. It therefore has liabilities totaling US $ 8.97 billion more than its cash and short-term receivables combined.
This deficit is not that big of a deal as Zimmer Biomet Holdings is worth US $ 27.2 billion and therefore could possibly raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Zimmer Biomet Holdings’ debt is 2.8 times its EBITDA, and its EBIT covers its interest expense 6.2 times more. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. It should be noted that Zimmer Biomet Holdings’ EBIT has soared like bamboo after the rain, gaining 36% in the past twelve months. This will make it easier to manage your debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Zimmer Biomet Holdings can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only repay its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Zimmer Biomet Holdings has generated strong free cash flow equivalent to 75% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
The good news is that Zimmer Biomet Holdings’ demonstrated ability to increase their EBIT thrills us like a fluffy puppy does a toddler. But frankly, we think its net debt to EBITDA undermines that impression a bit. It should also be noted that Zimmer Biomet Holdings belongs to the medical equipment industry, which is often seen as quite defensive. Looking at the big picture, we think Zimmer Biomet Holdings’ use of debt looks very reasonable and we are not worried about that. After all, reasonable leverage can increase returns on equity. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example – Zimmer Biomet Holdings has 2 warning signs we think you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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