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.' 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 Advanced Energy Industries, Inc. (NASDAQ:AEIS) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
How Much Debt Does Advanced Energy Industries Carry?
As you can see below, Advanced Energy Industries had US$318.0m of debt at March 2021, down from US$334.8m a year prior. However, it does have US$512.8m in cash offsetting this, leading to net cash of US$194.8m.
A Look At Advanced Energy Industries' Liabilities
The latest balance sheet data shows that Advanced Energy Industries had liabilities of US$326.9m due within a year, and liabilities of US$526.1m falling due after that. Offsetting these obligations, it had cash of US$512.8m as well as receivables valued at US$242.2m due within 12 months. So its liabilities total US$98.0m more than the combination of its cash and short-term receivables.
Since publicly traded Advanced Energy Industries shares are worth a total of US$3.90b, 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. 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.
Even more impressive was the fact that Advanced Energy Industries grew its EBIT by 134% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Advanced Energy Industries 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, Advanced Energy Industries recorded free cash flow worth 76% 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.
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$194.8m. And we liked the look of last year's 134% year-on-year EBIT growth. So is Advanced Energy Industries's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Advanced Energy Industries would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. 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.
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