These 4 measurements indicate that II-VI (NASDAQ: IIVI) is using debt safely

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Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies II-VI Incorporated (NASDAQ: IIVI) uses debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest analysis for II-VI

What is the debt of II-VI?

The image below, which you can click for more details, shows that II-VI had a debt of $ 1.38 billion at the end of June 2021, a reduction from $ 2.26 billion. US dollars over one year. But it also has $ 1.59 billion in cash to make up for that, which means it has $ 216.8 million in net cash.

NasdaqGS: IIVI History of debt to equity October 30, 2021

A look at the responsibilities of II-VI

We can see from the most recent balance sheet that II-VI had liabilities of US $ 729.6 million maturing within one year and liabilities of US $ 1.65 billion maturing within one year. of the. In compensation for these obligations, he had cash of US $ 1.59 billion as well as receivables valued at US $ 659.0 million due within 12 months. It therefore has a liability totaling US $ 129.4 million more than its combined cash and short-term receivables.

Considering the size of II-VI, it appears that its liquid assets are well balanced with its total liabilities. So the $ 6.50 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Despite its notable liabilities, II-VI has a net cash flow, so it’s fair to say it doesn’t have a heavy debt load!

Even more impressive, II-VI increased its EBIT by 218% year over year. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether II-VI 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, a business needs free cash flow to repay its debts; accounting profits are not enough. Although II-VI 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 builds. (or erode) that cash balance. Over the past three years, II-VI has generated free cash flow amounting to a very strong 93% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.

In summary

While it always makes sense to look at a company’s total liabilities, it is very reassuring that II-VI has $ 216.8 million in net cash. And he impressed us with free cash flow of US $ 428 million, or 93% of his EBIT. We therefore do not believe that the use of debt by II-VI is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for II-VI which you should know before investing here.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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 shares 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.

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