Is BE Semiconductor Industries (AMS:BESI) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that BE Semiconductor Industries N.V. (AMS:BESI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for BE Semiconductor Industries

What Is BE Semiconductor Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 BE Semiconductor Industries had €317.6m of debt, an increase on €304.6m, over one year. However, its balance sheet shows it holds €576.6m in cash, so it actually has €259.0m net cash.

How Healthy Is BE Semiconductor Industries' Balance Sheet?

The latest balance sheet data shows that BE Semiconductor Industries had liabilities of €169.4m due within a year, and liabilities of €362.8m falling due after that. Offsetting this, it had €576.6m in cash and €262.6m in receivables that were due within 12 months. So it can boast €306.9m 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 42%, thus reducing the spectre of future debt repayments. 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 BE Semiconductor Industries'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, a company can only pay off debt with cold hard cash, not accounting profits. While BE Semiconductor Industries 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, BE Semiconductor Industries produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that BE Semiconductor Industries has net cash of €259.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So is BE Semiconductor Industries's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for BE Semiconductor Industries you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.