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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, FormFactor, Inc. (NASDAQ:FORM) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
See our latest analysis for FormFactor
How Much Debt Does FormFactor Carry?
The image below, which you can click on for greater detail, shows that FormFactor had debt of US$27.0m at the end of September 2021, a reduction from US$36.0m over a year. But on the other hand it also has US$264.7m in cash, leading to a US$237.7m net cash position.
A Look At FormFactor's Liabilities
Zooming in on the latest balance sheet data, we can see that FormFactor had liabilities of US$160.0m due within 12 months and liabilities of US$60.2m due beyond that. On the other hand, it had cash of US$264.7m and US$108.2m worth of receivables due within a year. So it can boast US$152.7m more liquid assets than total liabilities.
This surplus suggests that FormFactor has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FormFactor has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that FormFactor grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 FormFactor'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While FormFactor 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 last three years, FormFactor actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.