Hologic (NASDAQ:HOLX) Seems To Use Debt Rather Sparingly

Simply Wall St · 10/17 11:16

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hologic, Inc. (NASDAQ:HOLX) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hologic

What Is Hologic's Debt?

As you can see below, Hologic had US$2.54b of debt at June 2024, down from US$2.82b a year prior. However, it does have US$2.45b in cash offsetting this, leading to net debt of about US$95.5m.

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NasdaqGS:HOLX Debt to Equity History October 17th 2024

How Healthy Is Hologic's Balance Sheet?

The latest balance sheet data shows that Hologic had liabilities of US$1.00b due within a year, and liabilities of US$2.94b falling due after that. Offsetting these obligations, it had cash of US$2.45b as well as receivables valued at US$628.5m due within 12 months. So its liabilities total US$863.1m more than the combination of its cash and short-term receivables.

Of course, Hologic has a titanic market capitalization of US$19.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Hologic has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With debt at a measly 0.077 times EBITDA and EBIT covering interest a whopping 448 times, it's clear that Hologic is not a desperate borrower. So relative to past earnings, the debt load seems trivial. Hologic's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hologic can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Hologic actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Hologic's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It's also worth noting that Hologic is in the Medical Equipment industry, which is often considered to be quite defensive. Considering this range of factors, it seems to us that Hologic is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. Another factor that would give us confidence in Hologic would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.