The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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.  Importantly, ICU Medical, Inc. (NASDAQ:ICUI) does carry debt.  But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow.  If things get really bad, the lenders can take control of the business.  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.  Of course, debt can be an important tool in businesses, particularly capital heavy businesses.  The first step when considering a company's debt levels is to consider its cash and debt together.

What Is ICU Medical's Net Debt?

As you can see below, ICU Medical had US$1.62b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail.    However, it does have US$275.6m in cash offsetting this, leading to net debt of about US$1.34b.  

NasdaqGS:ICUI Debt to Equity History June 4th 2024

A Look At ICU Medical's Liabilities

According to the last reported balance sheet, ICU Medical had liabilities of US$455.4m due within 12 months, and liabilities of US$1.77b due beyond 12 months.   On the other hand, it had cash of US$275.6m and US$148.2m worth of receivables due within a year.   So its liabilities total US$1.80b more than the combination of its cash and short-term receivables.  

This deficit is considerable relative to its market capitalization of US$2.59b, so it does suggest shareholders should keep an eye on ICU Medical's use of debt.  Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.  

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover).  This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.35 times and a disturbingly high net debt to EBITDA ratio of 5.1 hit our confidence in ICU Medical like a one-two punch to the gut.  The debt burden here is substantial.        The good news is that ICU Medical grew its EBIT a smooth 39% over the last twelve months.  Like a mother's loving embrace of a newborn that sort of growth builds resilience, putting the company in a stronger position to manage its 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 ICU Medical 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.  

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash.   So it's worth checking how much of that EBIT is backed by free cash flow.    During the last three years, ICU Medical produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect.  This free cash flow puts the company in a good position to pay down debt, when appropriate.  

Our View

ICU Medical's interest cover was a real negative on this analysis, as was its net debt to EBITDA.   But like a ballerina ending on a perfect pirouette, it has not trouble growing its EBIT.        We would also note that Medical Equipment industry companies like ICU Medical commonly do use debt without problems.     When we consider all the factors mentioned above, we do feel a bit cautious about ICU Medical's use of debt.  While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky.    There's no doubt that we learn most about debt from the balance sheet.  However, not all investment risk resides within the balance sheet - far from it.   Be aware that  ICU Medical is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...    

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.