David Iben put it right when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. We can see that PerkinElmer, Inc. (NYSE: PKI) uses debt in its business. But should shareholders be worried about its use of debt?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

What is PerkinElmer’s debt?

You can click on the chart below for historical numbers, but it shows PerkinElmer had $ 1.99 billion in debt in January 2021, up from $ 2.07 billion a year earlier. However, it has US $ 402.0 million in cash, which translates into net debt of approximately US $ 1.59 billion.

NYSE: History of PKI Debt to Equity May 1, 2021

How strong is PerkinElmer’s balance sheet?

The latest balance sheet data shows that PerkinElmer had liabilities of US $ 1.65 billion due within one year, and liabilities of US $ 2.57 billion thereafter. In contrast, it had US $ 402.0 million in cash and US $ 1.16 billion in receivables due within one year. It therefore has liabilities totaling $ 2.67 billion more than its cash and short-term receivables combined.

Given that publicly traded PerkinElmer shares are worth a very impressive US $ 14.6 billion total, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) cover his interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

PerkinElmer’s net debt is only 1.3 times its EBITDA. And its EBIT easily covers its interest costs, which is 20.4 times the size. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Best of all, PerkinElmer increased its EBIT by 148% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine PerkinElmer’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business can only pay off its debts with cash, not book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, PerkinElmer has produced strong free cash flow equivalent to 77% of its EBIT, which is what we expected. This hard, cold cash flow means he can reduce his debt whenever he wants.

Our point of view

The good news is that PerkinElmer’s demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does with a toddler. And the good news does not end there, because its EBIT growth rate also confirms this impression! Overall, we don’t think PerkinElmer is taking bad risks, as their leverage appears modest. The balance sheet therefore seems fairly healthy to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for PerkinElmer (1 is a little worrying) you should be aware of.

Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash net growth stocks, today.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.

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