These 4 measures indicate that PerkinElmer (NYSE:PKI) is using debt reasonably well

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. 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 can see that PerkinElmer, Inc. (NYSE: PKI) uses debt in its operations. But should shareholders worry about its use of debt?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

Check out our latest analysis for PerkinElmer

What is PerkinElmer’s debt?

You can click on the graph below for historical numbers, but it shows that in April 2022, PerkinElmer had $4.87 billion in debt, an increase from $2.58 billion, year-over-year . However, he also had $669.8 million in cash, so his net debt is $4.20 billion.

NYSE: PKI Debt to Equity History May 21, 2022

How strong is PerkinElmer’s balance sheet?

We can see from the most recent balance sheet that PerkinElmer had liabilities of US$1.26 billion due in one year, and liabilities of US$6.40 billion due beyond. As compensation for these obligations, it had cash of US$669.8 million and receivables valued at US$941.7 million due within 12 months. It therefore has liabilities totaling $6.05 billion more than its cash and short-term receivables, combined.

While that might sound like a lot, it’s not too bad since PerkinElmer has a huge market capitalization of US$18.5 billion, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

We would say that PerkinElmer’s moderate net debt to EBITDA ratio (2.4) is an indication of leverage caution. And its towering EBIT of 14.6 times its interest expense means that the debt burden is as light as a peacock feather. Unfortunately, PerkinElmer has seen its EBIT fall by 6.4% over the last twelve months. If earnings continue to fall, managing that debt will be as difficult as delivering hot soup on a unicycle. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether PerkinElmer can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, PerkinElmer has generated free cash flow of a very strong 86% of EBIT, more than we expected. This puts him in a very strong position to pay off the debt.

Our point of view

PerkinElmer’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But, on a darker note, we are a bit concerned about its EBIT growth rate. All in all, it looks like PerkinElmer can comfortably manage its current level of debt. Of course, while this leverage can improve return on equity, it comes with more risk, so it’s worth keeping an eye out for. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for PerkinElmer 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.

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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