Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Photronics, Inc. (NASDAQ:PLAB) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Photronics's Net Debt?
The image below, which you can click on for greater detail, shows that at August 2020 Photronics had debt of US$52.9m, up from US$49.1m in one year. But on the other hand it also has US$260.6m in cash, leading to a US$207.7m net cash position.
How Healthy Is Photronics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Photronics had liabilities of US$175.3m due within 12 months and liabilities of US$63.8m due beyond that. Offsetting this, it had US$260.6m in cash and US$152.4m in receivables that were due within 12 months. So it can boast US$173.9m more liquid assets than total liabilities.
This excess liquidity suggests that Photronics is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Photronics 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 Photronics has boosted its EBIT by 44%, 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 Photronics'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Photronics 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, Photronics burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case Photronics has US$207.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 44% year-on-year EBIT growth. So is Photronics's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Photronics insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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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