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Here's Why Veeco Instruments (NASDAQ:VECO) Can Manage Its Debt Responsibly

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  • VECO

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Veeco Instruments Inc. (NASDAQ:VECO) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Veeco Instruments

How Much Debt Does Veeco Instruments Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Veeco Instruments had debt of US$324.6m, up from US$303.4m in one year. However, its balance sheet shows it holds US$326.9m in cash, so it actually has US$2.25m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Veeco Instruments' Balance Sheet?

The latest balance sheet data shows that Veeco Instruments had liabilities of US$163.7m due within a year, and liabilities of US$369.1m falling due after that. Offsetting this, it had US$326.9m in cash and US$108.0m in receivables that were due within 12 months. So it has liabilities totalling US$97.9m more than its cash and near-term receivables, combined.

Given Veeco Instruments has a market capitalization of US$1.22b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Veeco Instruments also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Veeco Instruments made a loss at the EBIT level, last year, but improved that to positive EBIT of US$28m 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 Veeco Instruments can strengthen its balance sheet over time. 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. Veeco Instruments 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. Happily for any shareholders, Veeco Instruments actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Veeco Instruments has US$2.25m in net cash. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in US$48m. So we don't have any problem with Veeco Instruments'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 - Veeco Instruments has 1 warning sign we think you should be aware of.

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.

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