Legendary fund manager Li Lu (backed by Charlie Munger) once said: When I think about how risky a company is, I always like to look to the use of debt as too much debt can lead to bankruptcy. IDEX Co., Ltd. (NYSE:IEX) is in debt. But the bigger question is how much risk does that liability create?
When does debt become a problem
Debt is a tool that helps companies grow, but if companies can’t pay back their lenders, they exist at their mercy. Part of capitalism is the process of ‘creative destruction’ in which failed businesses are ruthlessly liquidated by bankers. But a more common (but still costly) situation is when a company has to dilute its shareholders with a cheap stock price just to manage its debt. That said, the most common situation is when a company manages its debt reasonably well to its advantage. When looking at debt levels, first consider both cash and debt levels together.
See the latest analysis from IDEX
What are IDEX’s liabilities?
As shown below, IDEX has a debt of US$1.19 billion as of September 2022, which is about the same as the previous year. Click the graph to see details. Conversely, it has cash of US$726 million and net debt of approximately US$465.1 million.
How strong is IDEX’s balance sheet?
Zooming in on the latest balance sheet data, we see that IDEX had $506.5 million in debt within the last 12 months, and $1.58 billion since then. On the other hand, he had US$726 million in cash and accounts receivable worth US$461 million due within one year. As such, it has a total liability of US$957.9 million, more than its cash and short-term debt combined.
Of course, IDEX’s market cap is huge at US$17.3 billion, so these liabilities are probably manageable. That said, it is clear that we must continue to monitor the balance sheet to ensure it does not deteriorate.
We primarily use two ratios to show the level of debt to income. The first is Net Debt divided by Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA) and the second is Earnings Before Interest and Taxes (EBIT) equals interest expense (or interest for short). cover) is the number of times to cover. The advantage of this approach is that it takes into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expense associated with that debt (its interest coverage ratio).
IDEX’s net debt is only 0.54 times EBITDA. And his EBIT covers interest expense more than a whopping 19.5 times. Thus, it can be argued that elephants are no more threatened by debt than rats are. Also good is that his EBIT at IDEX increased by 18% last year, further improving his ability to manage debt. The balance sheet is clearly an area to focus on when analyzing liabilities. However, it is future earnings that will determine whether IDEX can maintain a healthy balance sheet going forward. So, if you want to know what the experts think, this free report on analyst profit forecasts might be of interest to you.
Finally, companies can pay off their debt only with cold cash, not with accounting profits. So we’re always looking at how much of that EBIT translates into free cash flow. Over the last three years, IDEX has posted free cash flow equivalent to 78% of his EBIT. This is about normal when you consider free cash flow, excluding interest and taxes. This free cash flow allows the company to repay its debt if it needs to.
Fortunately, IDEX’s impressive interest rate coverage shows it’s dominance in debt. The good news doesn’t end there. The conversion of EBIT to free cash flow also supports that impression. Considering these various factors, IDEX appears to be very cautious with its liabilities and its risks are well managed. So the balance sheet looks pretty healthy. We believe tracking how fast earnings per share is growing is more important than most other metrics. If you’ve noticed that too, you’re in luck. Because today you can see an interactive chart showing his earnings per share history on IDEX for free.
After all, if you’re interested in a fast-growing company with a solid balance sheet, check out our list of net cash growth stocks right away.
Valuation is complicated, but we’re here to help make it simple.
find out if IDEX You may be overestimated or underestimated by checking out our comprehensive analysis including: Fair value estimates, risks and warnings, dividends, insider trading and financial health.
View Free Analysis
Do you have feedback on this article? What interests you? contact directly with us. Or send an email to our editorial team (at) Simplywallst.com.
This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies 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 financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …