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 can see that BE Semiconductor Industries N.V. (AMS:BESI) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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.
What Is BE Semiconductor Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 BE Semiconductor Industries had €386.6m of debt, an increase on €279.3m, over one year. But on the other hand it also has €605.8m in cash, leading to a €219.2m net cash position.
A Look At BE Semiconductor Industries' Liabilities
Zooming in on the latest balance sheet data, we can see that BE Semiconductor Industries had liabilities of €148.5m due within 12 months and liabilities of €427.8m due beyond that. Offsetting this, it had €605.8m in cash and €147.7m in receivables that were due within 12 months. So it actually has €177.3m more liquid assets than total liabilities.
This short term liquidity is a sign that BE Semiconductor Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that BE Semiconductor Industries has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that BE Semiconductor Industries has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. 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 BE Semiconductor Industries 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. BE Semiconductor Industries 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. Over the last three years, BE Semiconductor Industries recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to investigate a company's debt, in this case BE Semiconductor Industries has €219.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in €137m. So we don't think BE Semiconductor Industries's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with BE Semiconductor Industries .
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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