IDEX (NYSE: IEX) has a rock solid balance sheet

David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, IDEX Company (NYSE: IEX) carries debt. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

What is IDEX’s debt?

The image below, which you can click for more details, shows that in September 2021, IDEX was in debt of $ 1.19 billion, up from $ 1.04 billion in a year. However, it has $ 806.5 million in cash offsetting that, leading to net debt of around $ 383.6 million.

NYSE Debt to Equity History: IEX December 19, 2021

A look at the responsibilities of IDEX

According to the latest published balance sheet, IDEX had liabilities of US $ 469.1 million due in 12 months and liabilities of US $ 1.66 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 806.5 million as well as receivables valued at US $ 366.8 million due within 12 months. It therefore has a liability totaling US $ 955.0 million more than its cash and short-term receivables combined.

Considering that IDEX has a whopping market capitalization of US $ 17.4 billion, it is hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

IDEX has a low net debt to EBITDA ratio of just 0.53. And its EBIT covers its interest costs 14.9 times more. So we’re pretty relaxed about its ultra-conservative use of debt. It is also good that IDEX has increased its EBIT by 17% over the past year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether IDEX can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to pay off 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, IDEX has recorded free cash flow totaling 84% of its EBIT, which is higher than what we normally expected. This puts him in a very strong position to pay off the debt.

Our point of view

Fortunately, IDEX’s impressive interest coverage means it has the upper hand over its debt. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. Overall, we don’t think IDEX is taking bad risks, as its leverage appears modest. The balance sheet therefore seems rather healthy to us. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you need to know the 1 warning sign we spotted with IDEX.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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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 any stock 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 any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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