A market capitalization of $24.32B puts Zimmer Biomet Holdings Inc (NYSE:ZBH) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental aspect of investing in large caps is its financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Zimmer Biomet Holdings
Is ZBH’s level of debt at an acceptable level?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. ZBH’s debt-to-equity ratio stands at 99.76%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. ZBH’s profits amply covers interest at 4.31 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving ZBH ample headroom to grow its debt facilities.
Does ZBH generate enough cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether ZBH has the ability to repay its debt with cash from its business, which is less of a concern for large companies. ZBH’s recent operating cash flow was 0.17 times its debt within the past year. A ratio of over 0.1x shows that ZBH is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, ZBH could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case so investors should ask themselves if they believe ZBH can sustainably increase its operational efficiency going forward. Given that ZBH’s financial position may be different in the future, I recommend researching market expectations for ZBH’s future growth on our free analysis platform.