These 4 metrics indicate that Coherent (NASDAQ: COHR) is using debt reasonably well


These 4 metrics indicate that Coherent (NASDAQ: COHR) is using debt reasonably well

Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much finance debt can sink a business. Like many other companies Coherent, Inc. (NASDAQ: COHR) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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.

Check out our latest analysis for Coherent

How much debt does Coherent have?

The image below, which you can click for more details, shows that in January 2021, Coherent was in debt of $ 446.0 million, up from $ 413.0 million in a year. But on the other hand, it also has $ 543.6 million in cash, which leads to a net cash position of $ 97.6 million.

debt-equity-historical-analysis

A look at Coherent’s responsibilities

Zooming in on the latest balance sheet data, we can see that Coherent had a liability of US $ 296.7 million due within 12 months and a liability of US $ 641.1 million beyond. On the other hand, it had $ 543.6 million in cash and $ 237.8 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 156.3 million.

Of course, Coherent has a market cap of US $ 5.75 billion, so this liability is likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse. While he has some liabilities to note, Coherent also has more cash than debt, so we’re pretty confident he can handle his debt safely.

It is important to note that Coherent’s EBIT has fallen 49% over the past twelve months. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future profits, more than anything, that will determine Coherent’s 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 Coherent has net cash on their balance sheet, it’s still worth looking at their ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast they’re building (or erodes) that cash balance. . Over the past three years, Coherent has generated free cash flow amounting to a very solid 94% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.

In summary

While it always makes sense to look at a company’s total liabilities, it’s very reassuring that Coherent has $ 97.6 million in net cash. The icing on the cake is that he converted 94% of that EBIT to free cash flow, bringing in US $ 153 million. So we have no problem with Coherent’s use of debt. 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 2 warning signs for Coherent (1 shouldn’t be ignored!) Which you should be aware of before investing here.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

This Simply Wall St article is general in nature. 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 material. Simply Wall St has no position in the mentioned stocks.

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