Yahoo Finance BE Semiconductor Industries (AMS:BESI) Seems To Use Debt Quite Sensibly
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies BE Semiconductor Industries N.V. (AMS:BESI) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for BE Semiconductor Industries
What Is BE Semiconductor Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 BE Semiconductor Industries had €273.4m of debt, an increase on €283, over one year. However, it does have €383.7m in cash offsetting this, leading to net cash of €110.3m.
A Look At BE Semiconductor Industries's Liabilities
Zooming in on the latest balance sheet data, we can see that BE Semiconductor Industries had liabilities of €90.5m due within 12 months and liabilities of €310.9m due beyond that. Offsetting this, it had €383.7m in cash and €87.4m in receivables that were due within 12 months. So it can boast €69.8m more liquid assets than total liabilities.
This surplus suggests that BE Semiconductor Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BE Semiconductor Industries has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact BE Semiconductor Industries's saving grace is its low debt levels, because its EBIT has tanked 54% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 BE Semiconductor Industries can strengthen its balance sheet over time. 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 BE Semiconductor Industries 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, BE Semiconductor Industries generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that BE Semiconductor Industries has net cash of €110.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in €125m. So we don't have any problem with BE Semiconductor Industries's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with BE Semiconductor Industries .
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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