Entegris (NASDAQ: ENTG) seems to use debt rather sparingly
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, EntÃ©gris, Inc. (NASDAQ: ENTG) is in debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Entegris
What is the debt of Entegris?
As you can see below, Entegris had $ 936.4 million in debt in July 2021, up from $ 1.18 billion the year before. On the other hand, it has $ 401.0 million in cash, resulting in net debt of around $ 535.3 million.
How strong is Entegris’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Entegris had a liability of US $ 260.5 million due within 12 months and a liability of US $ 1.10 billion due beyond. In compensation for these obligations, it had cash of US $ 401.0 million as well as receivables valued at US $ 309.9 million due within 12 months. It therefore has a liability totaling US $ 646.4 million more than its cash and short-term receivables combined.
Given that Entegris has a whopping market cap of US $ 18.6 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Entegris has a low net debt to EBITDA ratio of just 0.88. And its EBIT easily covers its interest costs, being 10.1 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, we are happy to report that Entegris has increased its EBIT by 41%, reducing the specter of future debt repayments. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether Entegris 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 IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Entegris has generated strong free cash flow equivalent to 69% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
The good news is that Entegris’ demonstrated ability to increase EBIT delights us like a fluffy puppy does a toddler. And that’s just the start of the good news since its coverage of interest is also very encouraging. Overall, we do not believe that Entegris is taking bad risks, as its debt seems modest. We are therefore not worried about the use of a small leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Entegris a 2 warning signs we think you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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 material. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.