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

Warren Buffett famously said, '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. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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 BE Semiconductor Industries

How Much Debt Does BE Semiconductor Industries Carry?

You can click the graphic below for the historical numbers, but it shows that BE Semiconductor Industries had €304.3m of debt in June 2023, down from €317.6m, one year before. But it also has €378.3m in cash to offset that, meaning it has €74.0m net cash.

A Look At BE Semiconductor Industries' Liabilities

According to the last reported balance sheet, BE Semiconductor Industries had liabilities of €133.9m due within 12 months, and liabilities of €344.3m due beyond 12 months. Offsetting this, it had €378.3m in cash and €180.3m in receivables that were due within 12 months. So it can boast €80.5m more liquid assets than total liabilities.

This state of affairs indicates that BE Semiconductor Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €7.21b company is short on cash, but still worth keeping an eye on the balance sheet. 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 fact BE Semiconductor Industries's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BE Semiconductor Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case BE Semiconductor Industries has €74.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €260m, being 83% of its EBIT. So we don't have any problem with BE Semiconductor Industries's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that BE Semiconductor Industries is showing 2 warning signs in our investment analysis , 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.