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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Veeco Instruments Inc. (NASDAQ:VECO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Veeco Instruments Carry?
As you can see below, at the end of March 2024, Veeco Instruments had US$275.2m of debt, up from US$254.7m a year ago. Click the image for more detail. However, it does have US$296.9m in cash offsetting this, leading to net cash of US$21.6m.
How Strong Is Veeco Instruments' Balance Sheet?
We can see from the most recent balance sheet that Veeco Instruments had liabilities of US$234.4m falling due within a year, and liabilities of US$311.4m due beyond that. Offsetting these obligations, it had cash of US$296.9m as well as receivables valued at US$140.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$108.0m.
Given Veeco Instruments has a market capitalization of US$2.27b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.
On top of that, Veeco Instruments grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Veeco Instruments'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Veeco Instruments 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. Over the most recent three years, Veeco Instruments recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
We could understand if investors are concerned about Veeco Instruments's liabilities, but we can be reassured by the fact it has has net cash of US$21.6m. And it impressed us with its EBIT growth of 57% over the last year. So we don't think Veeco Instruments's use of debt is risky. 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 2 warning signs we think you should be aware of.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.