Here’s why Bruker (NASDAQ:BRKR) can manage debt responsibly
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. 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, Bruker Corporation (NASDAQ:BRKR) is in debt. 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. In the worst case, 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 at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
How much debt does Bruker carry?
You can click on the graph below for historical numbers, but it shows that in June 2022, Bruker had $1.19 billion in debt, up from $863.1 million, on a year. However, he also had $733.6 million in cash, so his net debt is $454.7 million.
How healthy is Bruker’s balance sheet?
According to the last published balance sheet, Bruker had liabilities of $818.4 million due within 12 months and liabilities of $1.58 billion due beyond 12 months. In return, he had $733.6 million in cash and $457.8 million in receivables due within 12 months. It therefore has liabilities totaling $1.20 billion more than its cash and short-term receivables, combined.
Given that publicly traded Bruker shares are worth a total of US$9.26 billion, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Bruker has a low debt to EBITDA ratio of just 0.87. And remarkably, although she has net debt, she has actually received more interest in the last twelve months than she has had to pay. So there’s no doubt that this company can go into debt and still be cool as a cucumber. And we also warmly note that Bruker increased its EBIT by 11% last year, making its leverage more manageable. There is no doubt that we learn the most about debt from the balance sheet. But it’s future earnings, more than anything, that will determine Bruker’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecasts.
Finally, a company can only repay its debts with cash, not book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Bruker has recorded free cash flow of 52% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Bruker’s impressive interest coverage means he has the upper hand on his debt. And the good news doesn’t stop there, since its net debt to EBITDA also confirms this impression! When we consider the range of factors above, it seems like Bruker is quite sensible with his use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. 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 outside of the balance sheet. For example – Bruker has 1 warning sign 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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