Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Oxford Instruments plc (LON: OXIG) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Oxford Instruments
What is the debt of Oxford Instruments?
The image below, which you can click for more details, shows that in September 2021 Oxford Instruments was in debt of £ 49.2million, up from £ 27.9million in a year. However, he has £ 119.3million in cash offsetting this, leading to a net cash of £ 70.1million.
A look at the responsibilities of Oxford Instruments
The latest balance sheet data shows Oxford Instruments had liabilities of £ 204.8million due within one year, and liabilities of £ 17.9million due after that. In return, he had £ 119.3 million in cash and £ 87.5 million in receivables due within 12 months. It therefore has liabilities totaling £ 15.9million more than its cash and short-term receivables combined.
Considering the size of Oxford Instruments, it appears that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the UK £ 1.5 billion company struggling to find liquidity, we still think it’s worth watching its balance sheet. While it has some liabilities to note, Oxford Instruments also has more cash than debt, so we’re pretty confident it can handle its debt safely.
On top of that, Oxford Instruments has increased its EBIT by 33% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Oxford Instruments can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. Although Oxford Instruments has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) this cash balance. Over the past three years Oxford Instruments has generated free cash flow of a very solid 86% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.
While it always makes sense to look at a company’s total liabilities, it is very reassuring that Oxford Instruments has £ 70.1million in net cash. The icing on the cake was that he converted 86% of that EBIT into free cash flow, bringing in £ 27million. So is Oxford Instruments debt a risk? It does not seem to us. Over time, stock prices tend to follow earnings per share, so if you are interested in Oxford Instruments, you may want to click here to view an interactive chart of its historical earnings per share.
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.