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 Ichor Holdings, Ltd. (NASDAQ:ICHR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Ichor Holdings's Debt?
As you can see below, Ichor Holdings had US$248.7m of debt at December 2023, down from US$300.7m a year prior. However, it does have US$80.0m in cash offsetting this, leading to net debt of about US$168.7m.
How Healthy Is Ichor Holdings' Balance Sheet?
We can see from the most recent balance sheet that Ichor Holdings had liabilities of US$99.0m falling due within a year, and liabilities of US$274.8m due beyond that. Offsetting these obligations, it had cash of US$80.0m as well as receivables valued at US$66.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$227.1m.
Since publicly traded Ichor Holdings shares are worth a total of US$1.22b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Ichor Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Ichor Holdings had a loss before interest and tax, and actually shrunk its revenue by 37%, to US$811m. That makes us nervous, to say the least.
Caveat Emptor
Not only did Ichor Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$43m. So we do think this stock is quite risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Ichor Holdings insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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