Yahoo Finance These 4 Measures Indicate That Brooks Automation (NASDAQ:BRKS) Is Using Debt Safely
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Brooks Automation, Inc. (NASDAQ:BRKS) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Brooks Automation
What Is Brooks Automation's Net Debt?
As you can see below, Brooks Automation had US$50.8m of debt at March 2020, down from US$543.5m a year prior. However, its balance sheet shows it holds US$242.4m in cash, so it actually has US$191.7m net cash.
A Look At Brooks Automation's Liabilities
Zooming in on the latest balance sheet data, we can see that Brooks Automation had liabilities of US$197.0m due within 12 months and liabilities of US$121.2m due beyond that. Offsetting this, it had US$242.4m in cash and US$194.1m in receivables that were due within 12 months. So it actually has US$118.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Brooks Automation could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Brooks Automation has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that Brooks Automation grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Brooks Automation can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Brooks Automation may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Brooks Automation actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While it is always sensible to investigate a company's debt, in this case Brooks Automation has US$191.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -US$6.7m, being 102% of its EBIT. So we don't think Brooks Automation's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Brooks Automation that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
