Does Advanced Energy Industries (NASDAQ:AEIS) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Advanced Energy Industries, Inc. (NASDAQ:AEIS) makes use of 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. 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, 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 Advanced Energy Industries

What Is Advanced Energy Industries's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Advanced Energy Industries had debt of US$919.8m, up from US$378.1m in one year. But on the other hand it also has US$986.1m in cash, leading to a US$66.2m net cash position.

How Healthy Is Advanced Energy Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Advanced Energy Industries had liabilities of US$314.8m due within 12 months and liabilities of US$1.08b due beyond that. On the other hand, it had cash of US$986.1m and US$270.3m worth of receivables due within a year. So it has liabilities totalling US$136.4m more than its cash and near-term receivables, combined.

Of course, Advanced Energy Industries has a market capitalization of US$4.00b, so these liabilities are probably manageable. 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, Advanced Energy Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Advanced Energy Industries if management cannot prevent a repeat of the 22% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Advanced Energy Industries'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 Advanced Energy Industries 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, Advanced Energy Industries recorded free cash flow worth 63% 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

We could understand if investors are concerned about Advanced Energy Industries's liabilities, but we can be reassured by the fact it has has net cash of US$66.2m. So we don't have any problem with Advanced Energy Industries's use of debt. We'd be motivated to research the stock further if we found out that Advanced Energy Industries insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.