David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Globus Medical, Inc. (NYSE:GMED) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Globus Medical's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Globus Medical had debt of US$417.4m, up from none in one year. But it also has US$517.8m in cash to offset that, meaning it has US$100.4m net cash.

How Strong Is Globus Medical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Globus Medical had liabilities of US$392.3m due within 12 months and liabilities of US$695.8m due beyond that. Offsetting these obligations, it had cash of US$517.8m as well as receivables valued at US$504.9m due within 12 months. So it has liabilities totalling US$65.5m more than its cash and near-term receivables, combined.

Having regard to Globus Medical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$6.83b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Globus Medical also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Globus Medical grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Globus Medical's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Globus Medical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Globus Medical recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Globus Medical's liabilities, but we can be reassured by the fact it has has net cash of US$100.4m. And it impressed us with free cash flow of US$165m, being 69% of its EBIT. So we don't think Globus Medical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Globus Medical that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.