Entegris (NASDAQ:ENTG) could easily take on more debt

Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Entegris, Inc. (NASDAQ:ENTG) uses debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Entegris

What is Entegris’ debt?

You can click on the chart below for historical numbers, but it shows Entegris had $937.3 million in debt in April 2022, up from $1.09 billion a year prior. However, he has $352.7 million in cash to offset this, resulting in a net debt of approximately $584.6 million.

NasdaqGS: ENTG Debt to Equity History May 16, 2022

A look at the responsibilities of Entegris

According to the last published balance sheet, Entegris had liabilities of US$371.7 million due within 12 months and liabilities of US$1.09 billion due beyond 12 months. In return, he had $352.7 million in cash and $372.8 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $737.6 million.

Given that Entegris has a colossal market capitalization of US$14.8 billion, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Entegris’ net debt represents only 0.78 times its EBITDA. And its EBIT covers its interest charges 14.3 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Entegris has grown its EBIT by 42% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Entegris’ ability to maintain a healthy balance sheet in the future. 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 its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Entegris has produced strong free cash flow equivalent to 59% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Entegris’ demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Given this set of factors, it seems to us that Entegris is quite cautious with its debt, and the risks seem well controlled. The balance sheet therefore seems rather healthy to us. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Entegris you should know.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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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