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. As with many other companies Advanced Energy Industries, Inc. (NASDAQ:AEIS) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Advanced Energy Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Advanced Energy Industries had US$298.9m of debt, an increase on none, over one year. However, it does have US$341.1m in cash offsetting this, leading to net cash of US$42.3m.
A Look At Advanced Energy Industries's Liabilities
We can see from the most recent balance sheet that Advanced Energy Industries had liabilities of US$355.9m falling due within a year, and liabilities of US$579.4m due beyond that. Offsetting these obligations, it had cash of US$341.1m as well as receivables valued at US$252.3m due within 12 months. So it has liabilities totalling US$341.8m more than its cash and near-term receivables, combined.
Of course, Advanced Energy Industries has a market capitalization of US$2.45b, so these liabilities are probably manageable. 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, Advanced Energy Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Advanced Energy Industries's saving grace is its low debt levels, because its EBIT has tanked 70% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While Advanced Energy Industries does have more liabilities than liquid assets, it also has net cash of US$42.3m. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in US$47m. So we are not troubled with Advanced Energy Industries's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Advanced Energy Industries's earnings per share history 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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