Benchmark Electronics (NYSE:BHE) seems to be using debt quite wisely

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Benchmark Electronics, Inc. (NYSE:BHE) is in debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. 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. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

What is Benchmark Electronics’ debt?

The image below, which you can click on for more details, shows that as of June 2022, Benchmark Electronics had $264.2 million in debt, up from $139.1 million in one year. On the other hand, he has $262.3 million in cash, resulting in a net debt of around $1.94 million.

NYSE: BHE Debt to Equity October 8, 2022

How healthy is Benchmark Electronics’ balance sheet?

We can see from the most recent balance sheet that Benchmark Electronics had liabilities of US$785.1 million due in one year, and liabilities of US$395.9 million due beyond. In return, he had $262.3 million in cash and $625.7 million in receivables due within 12 months. Thus, its liabilities total $293.0 million more than the combination of its cash and short-term receivables.

This shortfall isn’t that bad because Benchmark Electronics is worth $911.3 million and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. Either way, Benchmark Electronics has virtually no net debt, so it’s fair to say that they don’t have a lot of debt!

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

With debt at a measly 0.016 times EBITDA and EBIT covering interest at 10.8 times, it’s clear that Benchmark Electronics is not a desperate borrower. Indeed, relative to its earnings, its leverage seems light as a feather. On top of that, Benchmark Electronics has grown its EBIT by 53% in the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Benchmark Electronics 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 forecasts.

Finally, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Benchmark Electronics has burned a lot of money. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

Benchmark Electronics’ conversion of EBIT to free cash flow was a real negative in this analysis, even though the other factors we considered were considerably better. In particular, we are blown away by its EBIT growth rate. When we consider all the elements cited above, it seems to us that Benchmark Electronics manages its debt quite well. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for Benchmark Electronics (1 is concerning) 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.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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