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.' 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. As with many other companies Globus Medical, Inc. (NYSE:GMED) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Globus Medical Carry?

As you can see below, at the end of June 2024, Globus Medical had US$430.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$492.9m in cash, so it actually has US$62.4m net cash.

How Strong Is Globus Medical's Balance Sheet?

The latest balance sheet data shows that Globus Medical had liabilities of US$794.1m due within a year, and liabilities of US$223.3m falling due after that. Offsetting this, it had US$492.9m in cash and US$614.3m in receivables that were due within 12 months. So it can boast US$89.8m more liquid assets than total liabilities.

This state of affairs indicates that Globus Medical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$10.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Globus Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Globus Medical has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Globus Medical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Globus Medical produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Globus Medical has US$62.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think Globus Medical's use of debt is 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 Globus Medical is showing 2 warning signs in our investment analysis , you should know about...

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.