Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Bruker Corporation (NASDAQ:BRKR) has debt on its balance sheet. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Bruker
What is Bruker’s net debt?
The image below, which you can click on for more details, shows that as of March 2022, Bruker had $1.23 billion in debt, up from $850.8 million in one year. However, since he has a cash reserve of $923.2 million, his net debt is less, at around $304.8 million.
How strong is Bruker’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Bruker had liabilities of US$880.5 million due within 12 months and liabilities of US$1.63 billion due beyond. In return, he had $923.2 million in cash and $460.2 million in receivables due within 12 months. It therefore has liabilities totaling $1.13 billion more than its cash and short-term receivables, combined.
Of course, Bruker has a market capitalization of US$9.17 billion, so those liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Bruker’s net debt is only 0.58 times its EBITDA. And its EBIT covers its interest charges 31.8 times. So we’re pretty relaxed about his super-conservative use of debt. Another good sign, Bruker was able to increase its EBIT by 28% in twelve months, thus facilitating the repayment of its debt. There is no doubt that we learn the most about debt from the balance sheet. But it’s future earnings, more than anything, that will determine Bruker’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Bruker has produced strong free cash flow equivalent to 58% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.
Our point of view
The good news is that Bruker’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. Looking at the big picture, we think Bruker’s use of debt seems entirely reasonable and that doesn’t worry us. After all, reasonable leverage can increase return on equity. We’d be very happy to see if Bruker insiders took action. If you do too, click this link now to take a (free) look at our list of reported insider trades.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.