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. As with many other companies Amtech Systems, Inc. (NASDAQ:ASYS) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Amtech Systems's Debt?
The image below, which you can click on for greater detail, shows that Amtech Systems had debt of US$5.45m at the end of December 2019, a reduction from US$8.26m over a year. But on the other hand it also has US$52.7m in cash, leading to a US$47.3m net cash position.
A Look At Amtech Systems's Liabilities
According to the last reported balance sheet, Amtech Systems had liabilities of US$24.6m due within 12 months, and liabilities of US$8.77m due beyond 12 months. Offsetting these obligations, it had cash of US$52.7m as well as receivables valued at US$14.9m due within 12 months. So it actually has US$34.3m more liquid assets than total liabilities.
This luscious liquidity implies that Amtech Systems's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Amtech Systems has more cash than debt is arguably a good indication that it can manage its debt safely.
But the bad news is that Amtech Systems has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Amtech Systems'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. While Amtech Systems 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. Considering the last three years, Amtech Systems actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
While we empathize with investors who find debt concerning, you should keep in mind that Amtech Systems has net cash of US$47.3m, as well as more liquid assets than liabilities. So we are not troubled with Amtech Systems's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for Amtech Systems you should know about.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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