These 4 Measures Indicate That Advanced Energy Industries (NASDAQ:AEIS) Is Using Debt Safely

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.' 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 can see that Advanced Energy Industries, Inc. (NASDAQ:AEIS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Advanced Energy Industries Carry?

As you can see below, Advanced Energy Industries had US$373.3m of debt at December 2022, down from US$392.7m a year prior. But it also has US$460.9m in cash to offset that, meaning it has US$87.7m net cash.

A Look At Advanced Energy Industries' Liabilities

According to the last reported balance sheet, Advanced Energy Industries had liabilities of US$393.0m due within 12 months, and liabilities of US$532.9m due beyond 12 months. Offsetting these obligations, it had cash of US$460.9m as well as receivables valued at US$300.7m due within 12 months. So it has liabilities totalling US$164.3m more than its cash and near-term receivables, combined.

Given Advanced Energy Industries has a market capitalization of US$3.44b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On top of that, Advanced Energy Industries grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. 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 Advanced Energy Industries 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 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. During the last three years, Advanced Energy Industries produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. 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 Advanced Energy Industries's liabilities, but we can be reassured by the fact it has has net cash of US$87.7m. And it impressed us with its EBIT growth of 47% over the last year. So we don't think Advanced Energy Industries's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Advanced Energy Industries you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.