Does BE Semiconductor Industries (AMS:BESI) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that BE Semiconductor Industries N.V. (AMS:BESI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for BE Semiconductor Industries

How Much Debt Does BE Semiconductor Industries Carry?

As you can see below, at the end of September 2022, BE Semiconductor Industries had €319.3m of debt, up from €302.6m a year ago. Click the image for more detail. However, it does have €636.8m in cash offsetting this, leading to net cash of €317.5m.

A Look At BE Semiconductor Industries' Liabilities

We can see from the most recent balance sheet that BE Semiconductor Industries had liabilities of €164.5m falling due within a year, and liabilities of €363.9m due beyond that. Offsetting this, it had €636.8m in cash and €202.9m in receivables that were due within 12 months. So it can boast €311.3m more liquid assets than total liabilities.

This surplus suggests that BE Semiconductor Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

The good news is that BE Semiconductor Industries has increased its EBIT by 7.4% over twelve months, which should ease any concerns about debt repayment. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, BE Semiconductor Industries produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case BE Semiconductor Industries has €317.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €258m, being 79% of its EBIT. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for BE Semiconductor Industries you should know about.

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.