Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Zebra Technologies Corporation (NASDAQ: ZBRA) uses debt in its business. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.
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What is Zebra Technologies’ net debt?
You can click on the graph below for the historical figures, but it shows that Zebra Technologies was in debt of $ 1.02 billion in July 2021, down from $ 1.27 billion a year earlier. However, because it has a cash reserve of US $ 318.0 million, its net debt is less, at approximately US $ 706.0 million.
How strong is Zebra Technologies’ balance sheet?
We can see from the most recent balance sheet that Zebra Technologies had liabilities of US $ 1.55 billion due within one year and liabilities of US $ 1.45 billion due beyond. . In compensation for these obligations, it had cash of US $ 318.0 million as well as receivables valued at US $ 631.0 million maturing within 12 months. Its liabilities therefore total $ 2.06 billion more than the combination of its cash and short-term receivables.
Considering that Zebra Technologies shares listed on the stock exchange are worth a very impressive total of US $ 28.5 billion, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Zebra Technologies has a low net debt to EBITDA ratio of just 0.64. And its EBIT covers its interest costs 42.3 times more. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, we are happy to report that Zebra Technologies has increased its EBIT by 39%, reducing the specter of future debt repayments. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Zebra Technologies 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, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Zebra Technologies has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Fortunately, Zebra Technologies’ impressive interest coverage means they have the upper hand on their debt. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! It seems Zebra Technologies has no trouble standing on its own, and it has no reason to fear its lenders. In our opinion, he has a healthy and happy track record. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for Zebra Technologies which you should know before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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