Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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. Importantly, Qiagen N.V. (NYSE:QGEN) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Qiagen’s Debt?
The chart below, which you can click on for greater detail, shows that Qiagen had US$1.94b in debt in June 2022; about the same as the year before. However, it does have US$1.31b in cash offsetting this, leading to net debt of about US$624.5m.
How Healthy Is Qiagen’s Balance Sheet?
We can see from the most recent balance sheet that Qiagen had liabilities of US$962.9m falling due within a year, and liabilities of US$1.91b due beyond that. On the other hand, it had cash of US$1.31b and US$353.7m worth of receivables due within a year. So its liabilities total US$1.21b more than the combination of its cash and short-term receivables.
Given Qiagen has a market capitalization of US$9.99b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
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.
Qiagen has a low net debt to EBITDA ratio of only 0.73. And its EBIT covers its interest expense a whopping 15.7 times over. So we’re pretty relaxed about its super-conservative use of debt. Qiagen’s EBIT was pretty flat over the last year, but that shouldn’t be an issue given the it doesn’t have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Qiagen’s ability to maintain a healthy balance sheet going forward.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Qiagen produced sturdy free cash flow equating to 58% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
Qiagen’s interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14’s goalkeeper. And that’s just the beginning of the good news since its net debt to EBITDA is also very heartening. Taking all this data into account, it seems to us that Qiagen takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns.
