We Think FARO Technologies (NASDAQ:FARO) Can Stay On Top Of Its 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.' 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. Importantly, FARO Technologies, Inc. (NASDAQ:FARO) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does FARO Technologies Carry?

As you can see below, FARO Technologies had US$70.3m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$98.7m in cash, so it actually has US$28.4m net cash.

How Strong Is FARO Technologies' Balance Sheet?

We can see from the most recent balance sheet that FARO Technologies had liabilities of US$112.9m falling due within a year, and liabilities of US$120.5m due beyond that. Offsetting this, it had US$98.7m in cash and US$99.3m in receivables that were due within 12 months. So it has liabilities totalling US$35.4m more than its cash and near-term receivables, combined.

Since publicly traded FARO Technologies shares are worth a total of US$533.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, FARO Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for FARO Technologies

Notably, FARO Technologies made a loss at the EBIT level, last year, but improved that to positive EBIT of US$6.5m in the last twelve months. 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 FARO Technologies 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. FARO Technologies 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 last year, FARO Technologies actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about FARO Technologies's liabilities, but we can be reassured by the fact it has has net cash of US$28.4m. The cherry on top was that in converted 268% of that EBIT to free cash flow, bringing in US$17m. So we don't have any problem with FARO Technologies's use of debt. 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. For example - FARO Technologies has 1 warning sign we think you should be aware of.

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.