Oxford Instruments (LON:OXIG) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We note that Oxford Instruments plc (LON:OXIG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 Oxford Instruments had UK£13.7m of debt in September 2024, down from UK£22.6m, one year before. However, it does have UK£53.0m in cash offsetting this, leading to net cash of UK£39.3m.

How Healthy Is Oxford Instruments' Balance Sheet?

According to the last reported balance sheet, Oxford Instruments had liabilities of UK£172.9m due within 12 months, and liabilities of UK£42.8m due beyond 12 months. On the other hand, it had cash of UK£53.0m and UK£117.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£45.7m.

Of course, Oxford Instruments has a market capitalization of UK£1.25b, so these liabilities are probably manageable. 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.

Fortunately, Oxford Instruments grew its EBIT by 3.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Oxford Instruments has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Oxford Instruments recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Oxford Instruments has UK£39.3m in net cash. On top of that, it increased its EBIT by 3.7% in the last twelve months. So we are not troubled with Oxford Instruments's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Oxford Instruments's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.