Does Ichor Holdings (NASDAQ:ICHR) have a healthy balance sheet?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We notice that Ichor Holdings, Ltd. (NASDAQ:ICHR) has debt on its balance sheet. But should shareholders worry about its use of debt?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those 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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Ichor Holdings
What is Ichor Holdings’ net debt?
The image below, which you can click on for more details, shows Ichor Holdings had $164.4 million in debt at the end of September 2021, a reduction from $202.2 million year-over-year . But he also has $226.7 million in cash to offset that, meaning he has a net cash of $62.3 million.
How healthy is Ichor Holdings’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Ichor Holdings had liabilities of US$181.0 million due within 12 months and liabilities of US$166.9 million due beyond. On the other hand, it had liquidities of 226.7 million dollars and 121.7 million dollars of receivables at less than one year. These liquid assets therefore roughly correspond to the total liabilities.
This state of affairs indicates that Ichor Holdings’ balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So while it’s hard to imagine the US$1.20 billion company struggling for cash, we still think it’s worth keeping an eye on its balance sheet. Simply put, the fact that Ichor Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
Even better, Ichor Holdings increased its EBIT by 128% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Ichor Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. Although 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) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past three years, Ichor Holdings has produced strong free cash flow equivalent to 74% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.
While we sympathize with investors who find debt a concern, you should keep in mind that Ichor Holdings has net cash of US$62.3 million, as well as more liquid assets than liabilities. . And we liked the look of EBIT growth of 128% YoY last year. So is Ichor Holdings’ debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 1 warning sign for Ichor Holdings which you should be aware of before investing here.
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.
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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.