David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Mettler-Toledo International Inc. (NYSE: MTD) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels together.
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What is the debt of Mettler-Toledo International?
The image below, which you can click for more details, shows that in June 2021, Mettler-Toledo International was in debt of US $ 1.66 billion, compared to US $ 1.20 billion in one. year. On the other hand, it has $ 142.3 million in cash, resulting in net debt of around $ 1.51 billion.
A look at the responsibilities of Mettler-Toledo International
We can see from the most recent balance sheet that Mettler-Toledo International had liabilities of US $ 938.4 million due within one year and liabilities of US $ 2.01 billion due beyond. . In compensation for these obligations, it had cash of US $ 142.3 million as well as receivables valued at US $ 600.2 million maturing within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 2.21 billion.
Given that the listed Mettler-Toledo International shares are worth a very impressive US $ 32.1 billion total, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
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.
Mettler-Toledo International’s net debt to EBITDA ratio of around 1.5 suggests moderate use of debt. And its imposing EBIT of 24.3 times its interest costs, means the debt load is as light as a peacock feather. Also positive, Mettler-Toledo International increased its EBIT by 30% last year, which should make it easier to repay debt going forward. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Mettler-Toledo International 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. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Mettler-Toledo International has generated strong free cash flow equivalent to 74% 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
Fortunately, Mettler-Toledo International’s impressive interest coverage means it has the upper hand on its debt. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Considering this range of factors, it seems to us that Mettler-Toledo International is fairly conservative with its debt, and the risks appear to be well managed. We are therefore not worried about the use of a small leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Mettler-Toledo International shows 2 warning signs in our investment analysis , you must know…
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.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 material. Simply Wall St has no position in any of the stocks mentioned.
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