FormFactor (NASDAQ:FORM) Has A Pretty Healthy Balance Sheet

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 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. As with many other companies FormFactor, Inc. (NASDAQ:FORM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 FormFactor

What Is FormFactor's Net Debt?

As you can see below, FormFactor had US$15.2m of debt at April 2023, down from US$22.0m a year prior. But on the other hand it also has US$236.3m in cash, leading to a US$221.1m net cash position.

How Strong Is FormFactor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FormFactor had liabilities of US$128.2m due within 12 months and liabilities of US$67.2m due beyond that. Offsetting these obligations, it had cash of US$236.3m as well as receivables valued at US$106.9m due within 12 months. So it actually has US$147.7m more liquid assets than total liabilities.

This short term liquidity is a sign that FormFactor could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, FormFactor boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact FormFactor's saving grace is its low debt levels, because its EBIT has tanked 67% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 FormFactor 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. FormFactor 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, FormFactor generated free cash flow amounting to a very robust 91% 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 FormFactor has US$221.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$31m, being 91% of its EBIT. So we don't have any problem with FormFactor's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for FormFactor you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.