Is Cohu (NASDAQ:COHU) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Cohu, Inc. (NASDAQ:COHU) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cohu

What Is Cohu's Debt?

The image below, which you can click on for greater detail, shows that Cohu had debt of US$9.97m at the end of June 2024, a reduction from US$42.7m over a year. But on the other hand it also has US$262.4m in cash, leading to a US$252.4m net cash position.

How Healthy Is Cohu's Balance Sheet?

We can see from the most recent balance sheet that Cohu had liabilities of US$78.6m falling due within a year, and liabilities of US$64.3m due beyond that. Offsetting these obligations, it had cash of US$262.4m as well as receivables valued at US$103.0m due within 12 months. So it actually has US$222.6m more liquid assets than total liabilities.

This surplus suggests that Cohu is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Cohu boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cohu 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.

Over 12 months, Cohu made a loss at the EBIT level, and saw its revenue drop to US$500m, which is a fall of 33%. To be frank that doesn't bode well.

So How Risky Is Cohu?

While Cohu lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$5.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Cohu insider transactions.

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.