Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Camtek Ltd. (NASDAQ:CAMT) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. 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. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
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What is Camtek’s debt?
As you can see below, at the end of June 2022, Camtek had $195.2 million in debt, up from none a year ago. Click on the image for more details. However, he has $391.0 million in cash to offset this, which translates to net cash of $195.9 million.
How strong is Camtek’s balance sheet?
The latest balance sheet data shows that Camtek had liabilities of $86.3 million due within the year, and liabilities of $202.1 million due thereafter. In return, it had $391.0 million in cash and $77.4 million in receivables due within 12 months. He can therefore boast of having $180.1 million in cash more than total Passives.
This excess liquidity suggests that Camtek is taking a cautious approach to debt. Due to her strong net asset position, she is unlikely to run into problems with her lenders. Simply put, the fact that Camtek has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, we are pleased to report that Camtek increased its EBIT by 74%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Camtek can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. Camtek may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Camtek has produced strong free cash flow equivalent to 70% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
While it’s always a good idea to investigate a company’s debt, in this case Camtek has $195.9 million in net cash and a decent balance sheet. And it has impressed us with its 74% EBIT growth over the past year. We therefore do not believe that Camtek’s use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Camtek you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.
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