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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, FormFactor, Inc. (NASDAQ:FORM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for FormFactor

What Is FormFactor's Net Debt?

The image below, which you can click on for greater detail, shows that FormFactor had debt of US$14.4m at the end of December 2023, a reduction from US$15.4m over a year. But on the other hand it also has US$328.3m in cash, leading to a US$313.9m net cash position.

How Healthy Is FormFactor's Balance Sheet?

The latest balance sheet data shows that FormFactor had liabilities of US$131.1m due within a year, and liabilities of US$66.9m falling due after that. Offsetting these obligations, it had cash of US$328.3m as well as receivables valued at US$106.8m due within 12 months. So it actually has US$237.1m more liquid assets than total liabilities.

This surplus suggests that FormFactor has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, FormFactor boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for FormFactor if management cannot prevent a repeat of the 83% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 FormFactor'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 FormFactor 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. Over the most recent three years, FormFactor recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 FormFactor has net cash of US$313.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$8.6m. So we don't have any problem with FormFactor's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.