Veeco Instruments (NASDAQ:VECO) could easily take on more debt


Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Veeco Instruments Inc. (NASDAQ:VECO) has debt on its balance sheet. But does this debt worry shareholders?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest review for Veeco Instruments

How much debt does Veeco Instruments have?

As you can see below, Veeco Instruments had a debt of US$229.4 million in December 2021, compared to US$321.1 million the previous year. However, since he has a cash reserve of $223.9 million, his net debt is less, at around $5.51 million.

NasdaqGS: VECO Debt to Equity History May 5, 2022

How healthy is Veeco Instruments’ balance sheet?

We can see from the most recent balance sheet that Veeco Instruments had liabilities of US$189.2 million due in one year, and liabilities of US$272.1 million due beyond. On the other hand, it had cash of $223.9 million and $127.9 million in receivables within one year. It therefore has liabilities totaling $109.5 million more than its cash and short-term receivables, combined.

Of course, Veeco Instruments has a market capitalization of US$1.19 billion, so those liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. Carrying practically no net debt, Veeco Instruments has very little debt.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Veeco Instruments has a net debt to EBITDA ratio of 0.066, suggesting a very conservative balance sheet. But EBIT was only 2.2 times interest expense last year, showing that debt has had a negative impact on the business, limiting its options (and restricting its cash flow). available cash). Fortunately, Veeco Instruments is growing its EBIT faster than former Australian Prime Minister Bob Hawke dropped a yard glass, with a 138% gain over the last twelve months. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Veeco Instruments’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past two years, Veeco Instruments has recorded free cash flow of 78% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

Veeco Instruments’ EBIT growth rate suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But we have to admit that we find that its interest coverage has the opposite effect. Overall, we think Veeco Instruments’ use of debt seems entirely reasonable and we are not concerned about that. After all, reasonable leverage can increase return on equity. We would be very happy to see if Veeco Instruments insiders took any action. If you do too, click this link now to take a (free) look at our list of reported insider trades.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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