- Oops!Something went wrong.Please try again later.
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Brooks Automation, Inc. (NASDAQ:BRKS) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Brooks Automation Carry?
The chart below, which you can click on for greater detail, shows that Brooks Automation had US$50.4m in debt in September 2020; about the same as the year before. However, it does have US$295.7m in cash offsetting this, leading to net cash of US$245.3m.
How Healthy Is Brooks Automation's Balance Sheet?
According to the last reported balance sheet, Brooks Automation had liabilities of US$211.1m due within 12 months, and liabilities of US$134.4m due beyond 12 months. Offsetting these obligations, it had cash of US$295.7m as well as receivables valued at US$205.1m due within 12 months. So it actually has US$155.3m more liquid assets than total liabilities.
This surplus suggests that Brooks Automation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Brooks Automation boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Brooks Automation has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Brooks Automation'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. While Brooks Automation 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, Brooks Automation produced sturdy free cash flow equating to 74% 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.
While it is always sensible to investigate a company's debt, in this case Brooks Automation has US$245.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 46% over the last year. So is Brooks Automation's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Brooks Automation .
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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.