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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Becton, Dickinson and Company (NYSE:BDX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, 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 capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Becton Dickinson
What Is Becton Dickinson's Debt?
The image below, which you can click on for greater detail, shows that at September 2024 Becton Dickinson had debt of US$20.1b, up from US$15.9b in one year. However, because it has a cash reserve of US$2.16b, its net debt is less, at about US$17.9b.
A Look At Becton Dickinson's Liabilities
Zooming in on the latest balance sheet data, we can see that Becton Dickinson had liabilities of US$8.96b due within 12 months and liabilities of US$22.4b due beyond that. Offsetting this, it had US$2.16b in cash and US$3.03b in receivables that were due within 12 months. So it has liabilities totalling US$26.2b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Becton Dickinson has a huge market capitalization of US$68.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Becton Dickinson has net debt to EBITDA of 3.5 suggesting it uses a fair bit of leverage to boost returns. On the plus side, its EBIT was 7.9 times its interest expense, and its net debt to EBITDA, was quite high, at 3.5. Becton Dickinson grew its EBIT by 4.6% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Becton Dickinson 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.