Carl Zeiss Meditec (ETR:AFX) appears to be using debt sparingly

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Carl Zeiss Meditec AG (ETR:AFX) has debt on its balance sheet. But the more important question is: what risk does this debt create?

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

Discover our latest analysis for Carl Zeiss Meditec

How much debt does Carl Zeiss Meditec have?

The graph below, which you can click on for more details, shows that Carl Zeiss Meditec had a debt of 120.0 million euros in March 2022; about the same as the previous year. However, he has €8.40m in cash to offset this, resulting in a net debt of around €111.6m.

XTRA: AFX Debt to Equity History August 25, 2022

How strong is Carl Zeiss Meditec’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Carl Zeiss Meditec had liabilities of €499.3 million due within 12 months and liabilities of €270.7 million due beyond. In return, it had €8.40 million in cash and €1.30 billion in receivables due within 12 months. It can therefore take advantage of 536.5 million euros more cash than total Passives.

This short-term liquidity is a sign that Carl Zeiss Meditec could probably repay its debt easily, as its balance sheet is far from stretched. Either way, Carl Zeiss Meditec has virtually no net debt, so it’s fair to say it’s not heavily indebted!

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Carl Zeiss Meditec’s net debt is only 0.29 times its EBITDA. And its EBIT easily covers its interest charges, being 164 times greater. So we’re pretty relaxed about his super conservative use of debt. Fortunately, Carl Zeiss Meditec has increased its EBIT by 4.6% over the past year, which makes this debt even more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Carl Zeiss Meditec can strengthen its balance sheet over time. 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 must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Carl Zeiss Meditec has produced strong free cash flow equivalent to 67% 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

Carl Zeiss Meditec’s interest cover suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news does not stop there, since its net debt to EBITDA also confirms this impression! It should also be noted that Carl Zeiss Meditec is in the medical equipment industry, which is often seen as quite defensive. Zooming out, Carl Zeiss Meditec seems to be using debt quite sensibly; and that gets the green light from us. Although debt carries risks, when used wisely, it can also generate a higher return on equity. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive graph of Carl Zeiss Meditec’s earnings per share history for free.

Of course, if you’re 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-efficient growth stocks today.

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.

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