We think Merit Medical Systems (NASDAQ:MMSI) can manage debt with ease
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.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Merit Medical Systems, Inc. (NASDAQ:MMSI) is in debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Merit Medical Systems
How much debt does Merit Medical Systems have?
The image below, which you can click on for more details, shows that Merit Medical Systems had $252.5 million in debt at the end of March 2022, a reduction from $323.6 million year-over-year . However, he also had $53.9 million in cash, so his net debt is $198.6 million.
A Look at Merit Medical Systems’ Responsibilities
According to the last published balance sheet, Merit Medical Systems had liabilities of US$203.8 million due within 12 months and liabilities of US$369.4 million due beyond 12 months. On the other hand, it had a cash position of 53.9 million dollars and 169.4 million dollars of receivables at less than one year. Thus, its liabilities total $349.9 million more than the combination of its cash and short-term receivables.
Of course, Merit Medical Systems has a market cap of US$3.09 billion, so those liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Merit Medical Systems has a low net debt to EBITDA ratio of just 1.0. And its EBIT covers its interest charges 24.9 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Merit Medical Systems has grown its EBIT by 88% in the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But future earnings, more than anything, will determine Merit Medical Systems’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Merit Medical Systems has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Interest coverage from Merit Medical Systems suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. We also note that companies in the medical equipment industry like Merit Medical Systems generally use debt without issue. We believe that Merit Medical Systems is no more indebted to its lenders than birds are to birdwatchers. In our view, he has a healthy and happy record. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example – Merit Medical Systems has 2 warning signs we think you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.