Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Brooks Automation, Inc. (NASDAQ:BRKS) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Brooks Automation

What Is Brooks Automation's Net Debt?

The chart below, which you can click on for greater detail, shows that Brooks Automation had US$50.1m in debt in March 2021; about the same as the year before. However, it does have US$320.2m in cash offsetting this, leading to net cash of US$270.1m.

A Look At Brooks Automation's Liabilities

We can see from the most recent balance sheet that Brooks Automation had liabilities of US$265.6m falling due within a year, and liabilities of US$132.4m due beyond that. Offsetting this, it had US$320.2m in cash and US$239.1m in receivables that were due within 12 months. So it actually has US$161.2m more liquid assets than total liabilities.

This surplus suggests that Brooks Automation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Brooks Automation boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Brooks Automation grew its EBIT by 133% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Brooks Automation's ability to maintain a healthy balance sheet going forward. 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. During the last three years, Brooks Automation produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Brooks Automation has US$270.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 133% over the last year. 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 1 warning sign for Brooks Automation that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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