Warren Buffett once said, “Volatility is far from synonymous with risk.” It seems the smart money knows that debt – which usually comes with bankruptcies – is a very important factor when you assess how risky a company is. important, Stryker Corporation (NYSE:SYK) does bear debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help companies grow, but if a company is unable to pay off its lenders, it is at their mercy. An essential part of capitalism is the process of ‘creative destruction’, in which failed companies are mercilessly liquidated by their bankers. While not too common, we often see indebted companies permanently diluting their shareholders as lenders force them to raise capital at a difficult price. That said, the most common situation is for a company to manage its debt fairly well — and for its own benefit. When we examine debt levels, we first look at both cash and debt levels together.
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Check out our latest analysis for Stryker
What is Stryker’s fault?
The chart below, which you can click on for more details, shows that Stryker had US$12.7 billion in debt in June 2021; about the same as the year before. However, it also had US$2.33 billion in cash, and so its net debt is US$10.4 billion.
How healthy is Stryker’s balance sheet?
The most recent balance sheet shows that Stryker had liabilities of $4.25 billion that fell due within one year, and liabilities of $15.6 billion that were due thereafter. To offset these obligations, it had $2.33 billion in cash and receivables worth $2.71 billion to be paid within 12 months. So his liabilities total $14.8 billion more than the combination of his cash and receivables.
Given that Stryker has a massive market cap of $99.7 billion, it’s hard to believe that these liabilities pose a major threat. But there are plenty of commitments that we definitely recommend to shareholders to keep track of the balance sheet going forward.
We measure a company’s indebtedness relative to its earning capital by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and by calculating how easily its earnings before interest and taxes (EBIT) offset interest. cover costs (interest cover). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with the interest coverage ratio).
Stryker’s net debt to EBITDA ratio of approximately 2.3 suggests only moderate use of debt. And its strong interest coverage of 10.7 times makes us even more comfortable. Importantly, Stryker has grown its EBIT by 34% over the past 12 months, and that growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious place to start. But it is primarily future earnings that will determine Stryker’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future, check this out free analyst earnings forecast report.
Finally, while the tax man loves accounting profits, lenders only accept cold hard cash. So we always look at how much of that EBIT is translated into free cash flow. Over the past three years, Stryker posted free cash flow equal to 72% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard money means it can reduce its debt whenever it wants to.
Fortunately, Stryker’s impressive EBIT growth implies that it has the upper hand over its debt. And the good news doesn’t stop there, because the interest cover also supports that impression! We also note that companies in the medical device industry, such as Stryker, usually use debt without any problem. Zooming out, Stryker seems reasonable to deal with debt; and that gets the wink from us. While debt carries risks, when used wisely, it can also provide a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside within the balance sheet – far from it. Example: we’ve seen it 3 warning signs for Stryker you should be aware.
If you are interested in investing in companies that can make profits without debt, check this out free list of growing companies with net cash on the balance sheet.
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This article from 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 as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no position in said stocks.
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