We Think BE Semiconductor Industries (AMS:BESI) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 as of September 2024 BE Semiconductor Industries had €526.8m of debt, an increase on €301.0m, over one year. However, its balance sheet shows it holds €637.4m in cash, so it actually has €110.7m net cash.

A Look At BE Semiconductor Industries' Liabilities

The latest balance sheet data shows that BE Semiconductor Industries had liabilities of €139.2m due within a year, and liabilities of €561.6m falling due after that. Offsetting this, it had €637.4m in cash and €169.3m in receivables that were due within 12 months. So it can boast €105.9m 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 €9.88b 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.

Fortunately, BE Semiconductor Industries grew its EBIT by 7.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that BE Semiconductor Industries has net cash of €110.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €158m, being 88% 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for BE Semiconductor Industries you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.