Ichor Holdings (NASDAQ: ICHR) could easily take on more debt
Warren Buffett said: “Volatility is far from synonymous with risk”. 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 Ichor Holdings, Ltd. (NASDAQ: ICHR) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Ichor Holdings
What is the debt of Ichor Holdings?
The image below, which you can click for more details, shows that Ichor Holdings had a debt of $ 168.3 million at the end of March 2021, a reduction from $ 181.1 million. US dollars over one year. However, it has US $ 242.9 million in cash offsetting this, leading to net cash of US $ 74.6 million.
How strong is Ichor Holdings’ balance sheet?
We can see from the most recent balance sheet that Ichor Holdings had liabilities of US $ 183.1 million due within one year and liabilities of US $ 168.1 million due beyond. In compensation for these obligations, he had cash of US $ 242.9 million as well as receivables valued at US $ 108.7 million due within 12 months. These liquid assets therefore correspond roughly to the total liabilities.
This fact indicates that Ichor Holdings’ balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So the $ 1.27 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Ichor Holdings has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!
Best of all, Ichor Holdings increased its EBIT by 207% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. 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 Ichor Holdings’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. While Ichor Holdings has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building. (or erode) this cash balance. Fortunately for all shareholders, Ichor Holdings has actually generated more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
While we sympathize with investors who find debt of concern, you should keep in mind that Ichor Holdings has net cash of US $ 74.6 million, as well as more liquid assets than liabilities. . The icing on the cake is that he converted 107% of that EBIT into free cash flow, bringing in US $ 72 million. We therefore do not believe that the use of debt by Ichor Holdings is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Ichor Holdings you should know.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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