Does Oxford Instruments (LON:OXIG) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Oxford Instruments plc (LON:OXIG) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Oxford Instruments

What Is Oxford Instruments's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Oxford Instruments had UK£14.0m of debt, an increase on UK£12.5m, over one year. But on the other hand it also has UK£97.8m in cash, leading to a UK£83.8m net cash position.

A Look At Oxford Instruments' Liabilities

We can see from the most recent balance sheet that Oxford Instruments had liabilities of UK£198.2m falling due within a year, and liabilities of UK£42.4m due beyond that. On the other hand, it had cash of UK£97.8m and UK£105.8m worth of receivables due within a year. So it has liabilities totalling UK£37.0m more than its cash and near-term receivables, combined.

Given Oxford Instruments has a market capitalization of UK£1.36b, 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. While it does have liabilities worth noting, Oxford Instruments also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Oxford Instruments's EBIT dived 10%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Oxford Instruments 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 company can only pay off debt with cold hard cash, not accounting profits. Oxford Instruments 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. Looking at the most recent three years, Oxford Instruments recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Oxford Instruments's liabilities, but we can be reassured by the fact it has has net cash of UK£83.8m. So we are not troubled with Oxford Instruments's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Oxford Instruments insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com