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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.' 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 Camtek Ltd. (NASDAQ:CAMT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Camtek
What Is Camtek's Debt?
As you can see below, at the end of June 2022, Camtek had US$195.2m of debt, up from none a year ago. Click the image for more detail. However, it does have US$391.0m in cash offsetting this, leading to net cash of US$195.9m.
How Strong Is Camtek's Balance Sheet?
We can see from the most recent balance sheet that Camtek had liabilities of US$86.3m falling due within a year, and liabilities of US$202.1m due beyond that. Offsetting this, it had US$391.0m in cash and US$73.1m in receivables that were due within 12 months. So it actually has US$175.8m more liquid assets than total liabilities.
This surplus suggests that Camtek has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Camtek 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 Camtek has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. 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 Camtek 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Camtek 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, Camtek recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.