Is FormFactor (NASDAQ:FORM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that FormFactor, Inc. (NASDAQ:FORM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for FormFactor

What Is FormFactor's Net Debt?

You can click the graphic below for the historical numbers, but it shows that FormFactor had US$14.1m of debt in March 2024, down from US$15.2m, one year before. However, it does have US$349.2m in cash offsetting this, leading to net cash of US$335.0m.

How Strong Is FormFactor's Balance Sheet?

The latest balance sheet data shows that FormFactor had liabilities of US$130.6m due within a year, and liabilities of US$65.5m falling due after that. Offsetting these obligations, it had cash of US$349.2m as well as receivables valued at US$101.7m due within 12 months. So it can boast US$254.8m 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 65% 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. 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 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.

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. 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 we empathize with investors who find debt concerning, you should keep in mind that FormFactor has net cash of US$335.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$36m. So we are not troubled with FormFactor's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for FormFactor you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com