Veeco Instruments (NASDAQ:VECO) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Veeco Instruments Inc. (NASDAQ:VECO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Veeco Instruments's Net Debt?

As you can see below, Veeco Instruments had US$276.2m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$344.3m in cash to offset that, meaning it has US$68.1m net cash.

How Strong Is Veeco Instruments' Balance Sheet?

We can see from the most recent balance sheet that Veeco Instruments had liabilities of US$192.3m falling due within a year, and liabilities of US$288.5m due beyond that. On the other hand, it had cash of US$344.3m and US$133.9m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Veeco Instruments' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.04b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Veeco Instruments boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Veeco Instruments

The good news is that Veeco Instruments has increased its EBIT by 5.7% over twelve months, which should ease any concerns about debt repayment. 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'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. 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 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Veeco Instruments has US$68.1m in net cash. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$46m. So we don't think Veeco Instruments's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 , and 1 of those is a bit unpleasant...

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.