Mirion Technologies (NYSE:MIR) appears to be using its debt quite wisely

Howard Marks summed it up when he said: “Instead of worrying about the volatility of stock prices, the possibility of permanent loss is the risk I worry about… and every practical investor I know worries about “When we think about how risky a company is, we always look at the use of debt, because over-indebtedness can lead to ruin. We can see that Mirion Technologies, Inc. (NYSE:MIR) uses debt in its business. But should shareholders be concerned about the use of debt?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a business cannot easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company must dilute shareholders at a cheap share price just to get debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high returns. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Mirion Technologies

How much debt does Mirion Technologies have?

The chart below, which you can click on for more detail, shows that Mirion Technologies had $685.5 million in debt as of September 2024; about the same as the year before. However, the company also had US$139.1m in cash, leaving its net debt at US$546.4m.

How healthy is Mirion Technologies’ balance sheet?

According to the last reported balance sheet, Mirion Technologies had liabilities of US$252.6m due within 12 months, and liabilities of US$826.4m due beyond 12 months. Offsetting these obligations, it had cash of US$139.1m as well as receivables valued at US$220.3m due within 12 months. So its liabilities total US$719.6m more than the combination of its cash and short-term receivables.

While this may seem like a lot, it’s not that bad since Mirion Technologies has a market capitalization of US$3.40 billion, and therefore could likely strengthen its balance sheet by raising capital if needed. But it’s clear that we should definitely take a close look at whether it can manage its debt without dilution.

We use two main ratios to inform us about the level of debt relative to profits. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times earnings before interest and tax (EBIT) cover interest expense (or interest cover, for short). . Therefore, we look at debt relative to earnings both with and without depreciation charges.

While we wouldn’t be worried about Mirion Technologies’ net debt to EBITDA ratio of 3.2, we believe its extremely low interest coverage of 0.24 is a sign of high leverage. It appears that the company is incurring high depreciation and amortization costs, so its debt load may be higher than it first appears, given that EBITDA is arguably a generous measure of profit. As such, shareholders should probably be aware that interest expenses appear to have had a major impact on the business recently. The bright spot, however, was that Mirion Technologies achieved positive EBIT of US$13m in the last twelve months, an improvement on its loss the previous year. There is no doubt that the balance sheet is where we learn the most about debt. But it is future earnings that will determine whether Mirion Technologies can maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

And finally, while the tax officer is happy about accounting profits, lenders only accept cold hard cash. So it’s worth checking how much of the earnings before interest and taxes (EBIT) is covered by free cash flow. In the last year, Mirion Technologies actually generated more free cash flow than EBIT. This strong cash generation warms our hearts like a puppy in a bumblebee costume.

Our view

Mirion Technologies’ interest rate protection was a real drawback in this analysis, even though the other factors we considered were significantly better. We are particularly impressed by the conversion of EBIT to free cash flow. Given this range of data, we think Mirion Technologies is in a good position to manage its debt. But be careful: we believe the debt level is high enough to warrant ongoing monitoring. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be difficult to identify. Every company has them, and we discovered them 2 warning signs for Mirion Technologies you should know that.

Ultimately, it’s often better to focus on companies that are free of net debt. You can access our special list of such companies (all with a track record of growing profits). It’s free.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.