Is Veeco Instruments (NASDAQ:VECO) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Veeco Instruments Inc. (NASDAQ:VECO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Veeco Instruments

What Is Veeco Instruments's Net Debt?

The chart below, which you can click on for greater detail, shows that Veeco Instruments had US$274.9m in debt in December 2023; about the same as the year before. But on the other hand it also has US$305.4m in cash, leading to a US$30.5m net cash position.

How Healthy Is Veeco Instruments' Balance Sheet?

The latest balance sheet data shows that Veeco Instruments had liabilities of US$218.0m due within a year, and liabilities of US$338.6m falling due after that. Offsetting these obligations, it had cash of US$305.4m as well as receivables valued at US$127.4m due within 12 months. So it has liabilities totalling US$123.8m more than its cash and near-term receivables, combined.

Since publicly traded Veeco Instruments shares are worth a total of US$1.96b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Veeco Instruments boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Veeco Instruments grew its EBIT by 16% last year, making its debt load easier to handle. 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 Veeco Instruments can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Veeco Instruments 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. Over the most recent three years, Veeco Instruments recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Veeco Instruments's liabilities, but we can be reassured by the fact it has has net cash of US$30.5m. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in US$34m. So is Veeco Instruments's debt a risk? It doesn't seem so to us. 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. Be aware that Veeco Instruments is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.