Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies Brooks Automation, Inc. (NASDAQ:BRKS) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Brooks Automation’s Debt?
The image below, which you can click on for greater detail, shows that Brooks Automation had debt of US$48.2m at the end of September 2019, a reduction from US$196.1m over a year. But it also has US$335.8m in cash to offset that, meaning it has US$287.6m net cash.
How Healthy Is Brooks Automation’s Balance Sheet?
We can see from the most recent balance sheet that Brooks Automation had liabilities of US$273.0m falling due within a year, and liabilities of US$104.8m due beyond that. Offsetting these obligations, it had cash of US$335.8m as well as receivables valued at US$166.7m due within 12 months. So it can boast US$124.7m more liquid assets than total liabilities.
This surplus suggests that Brooks Automation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Brooks Automation has more cash than debt is arguably a good indication that it can manage its debt safely.
Importantly, Brooks Automation grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Brooks Automation’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. Brooks Automation 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. Happily for any shareholders, Brooks Automation actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to investigate a company’s debt, in this case Brooks Automation has US$287.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 203% of that EBIT to free cash flow, bringing in US$67m. So we don’t think Brooks Automation’s use of debt is risky. Another factor that would give us confidence in Brooks Automation would be if insiders have been buying shares: if you’re conscious of that signal too, you can find out instantly by clicking this link.
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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