Oxford Instruments (LON:OXIG) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Oxford Instruments plc (LON:OXIG) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Oxford Instruments

What Is Oxford Instruments's Net Debt?

As you can see below, at the end of March 2021, Oxford Instruments had UK£30.4m of debt, up from UK£27.9m a year ago. Click the image for more detail. But it also has UK£128.0m in cash to offset that, meaning it has UK£97.6m net cash.

How Healthy Is Oxford Instruments' Balance Sheet?

According to the last reported balance sheet, Oxford Instruments had liabilities of UK£174.0m due within 12 months, and liabilities of UK£10.5m due beyond 12 months. Offsetting this, it had UK£128.0m in cash and UK£77.5m in receivables that were due within 12 months. So it actually has UK£21.0m more liquid assets than total liabilities.

This state of affairs indicates that Oxford Instruments' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£1.35b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Oxford Instruments boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Oxford Instruments grew its EBIT by 12% last year, making its debt load easier to handle. 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 Oxford Instruments's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Oxford Instruments generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Oxford Instruments has net cash of UK£97.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£37m, being 93% of its EBIT. So we don't think Oxford Instruments's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Oxford Instruments is showing 1 warning sign in our investment analysis , you should know about...

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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