Does Veeco Instruments (NASDAQ:VECO) Have A 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 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, Veeco Instruments Inc. (NASDAQ:VECO) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Veeco Instruments

What Is Veeco Instruments's Debt?

The chart below, which you can click on for greater detail, shows that Veeco Instruments had US$274.3m in debt in June 2023; about the same as the year before. But it also has US$286.4m in cash to offset that, meaning it has US$12.1m net cash.

How Strong Is Veeco Instruments' Balance Sheet?

The latest balance sheet data shows that Veeco Instruments had liabilities of US$282.3m due within a year, and liabilities of US$333.5m falling due after that. Offsetting this, it had US$286.4m in cash and US$150.6m in receivables that were due within 12 months. So its liabilities total US$178.8m more than the combination of its cash and short-term receivables.

Given Veeco Instruments has a market capitalization of US$1.58b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Veeco Instruments also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Veeco Instruments has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Veeco Instruments's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Veeco Instruments 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, Veeco Instruments generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Veeco Instruments's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$12.1m. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$85m. So we are not troubled with Veeco Instruments'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. We've identified 3 warning signs with Veeco Instruments , and understanding them should be part of your investment process.

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.