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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Oxford Instruments plc (LON:OXIG) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Oxford Instruments

What Is Oxford Instruments's Debt?

You can click the graphic below for the historical numbers, but it shows that Oxford Instruments had UK£30.4m of debt in March 2021, down from UK£52.0m, one year before. But on the other hand it also has UK£128.0m in cash, leading to a UK£97.6m net cash position.

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. On the other hand, it had cash of UK£128.0m and UK£73.4m worth of receivables due within a year. So it actually has UK£16.9m 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£1.37b 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 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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. During the last three years, Oxford Instruments generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in UK£37m. So we don't think Oxford Instruments's use of debt is risky. We'd be very excited to see if Oxford Instruments insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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