Here's Why Ichor Holdings (NASDAQ:ICHR) Has A Meaningful Debt Burden

Warren Buffett, a well-known figure, once mentioned that volatility does not always mean risk. Hence, it is evident that wise investors understand the significance of debt when evaluating the risk associated with a company, as debt is often associated with bankruptcy. In the case of Ichor Holdings, Ltd., it is observed that they do utilize debt in their operations. However, it raises a query as to whether this debt should be a cause for concern for the company's shareholders.

The Risk Of Debt

The use of debt is a helpful tool for businesses to expand, but if a business is unable to repay its lenders, it becomes dependent on them. In a capitalist system, failed businesses are often ruthlessly eliminated by their lenders through a process known as "creative destruction". However, a more common (though still costly) scenario is when a company is forced to issue more shares at a low price in order to manage its debt. However, debt can be a beneficial tool for businesses that require capital to invest in high-yielding growth opportunities instead of diluting their shares. The first step in assessing a company's debt levels is to consider its cash and debt collectively.

Take a look at our most recent examination for Ichor Holdings.

Ichor Holdings: Net Debt Overview

Below, you can observe that Ichor Holdings had a total debt of US$299.0m as of March 2023, approximately equal to the previous year. For more intricate information, feel free to click on the chart provided. On the other hand, the company possesses cash reserves amounting to US$68.8m, resulting in a net debt of roughly US$230.1m.

Is Ichor Holdings' Balance Sheet Healthy?

Based on the most recent financial statement, Ichor Holdings had debts of $118.2 million that needed to be settled within the next year, and debts of $328.5 million that were due in longer-term. However, it had $68.8 million in available cash and $122.7 million in receivables that would be collected within the next year. Therefore, the company's combined cash and short-term receivables fell short by a total of $255.2 million to cover its liabilities.

Although it may appear overwhelming, the situation is not as dire because Ichor Holdings holds a market value of US$1.05b. This suggests that the company could potentially improve its financial standing by obtaining additional funds if deemed necessary. Nevertheless, it is crucial to thoroughly examine its capacity to settle outstanding debts.

We employ two primary ratios to gauge the amount of debt compared to earnings. The initial ratio is the division of net debt by earnings before interest, tax, depreciation, and amortization (EBITDA), and the second ratio determines how many times the earnings before interest and tax (EBIT) can cover the interest expense (also known as interest cover). Consequently, we assess the debt in relation to earnings, taking into account both depreciation and amortization costs and excluding them.

Ichor Holdings currently has a net debt that is 2.0 times its EBITDA, which isn't too excessive. However, its interest coverage ratio is a bit low, with EBIT only being 5.9 times the interest expense. This indicates that the interest payments may be somewhat of a burden for the company. Unfortunately, Ichor Holdings experienced a 3.0% decrease in EBIT in the past year. If this trend continues, it could result in the company's debt becoming burdensome, similar to the heavy heart of a polar bear watching its only cub. When evaluating debt levels, it is important to look at the balance sheet. However, future earnings will play a crucial role in determining Ichor Holdings' ability to maintain a healthy balance sheet moving forward. To gain insights from professionals, you may find this complimentary report on analyst profit forecasts to be interesting.

In the end, even though the tax collector may appreciate accounting profits, creditors only consider actual money. Therefore, we consistently assess the amount of EBIT that is converted into available cash. In the past three years, Ichor Holdings has reported that only 14% of its EBIT is translated into free cash flow, which is significantly inadequate. This weak cash conversion rate hampers its capacity to effectively handle and reduce debt.

The conversion of EBIT to free cash flow by Ichor Holdings had a significantly negative impact on our analysis. However, there are other factors that make it look slightly better. One such factor is its strong interest cover. Taking into account all the aspects mentioned above, it appears that investing in Ichor Holdings could be somewhat risky due to its debt. It's important to note that not all risks are bad, as they can lead to higher returns if successful. Nonetheless, the debt risk is something to keep in mind. While analyzing debt levels, it is crucial to start with the balance sheet. However, investment risks do not solely reside there. In fact, we have come across one warning sign for Ichor Holdings that you should be aware of before making an investment decision.

After everything is considered, it can be simpler to concentrate on businesses that do not require any borrowed money. Interested readers can easily obtain a completely costless list of stocks that are experiencing growth and have no financial debts at the present moment.

Simplifying Valuation: Our Surpassing Help

Discover if Ichor Holdings may be over or undervalued by perusing our in-depth evaluation that encompasses assessments of fair value, potential risks and cautions, dividend information, insider dealings, and financial well-being.

Check out the complimentary evaluation

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This blog post from Simply Wall St is of a general nature. We offer analysis based on past data and predictions from analysts, using a fair and neutral approach in our articles which are not meant to be financial advisory. It should not be considered as a suggestion to purchase or sell any stocks and does not consider your goals or financial circumstances. Our goal is to provide you with analysis that focuses on the long-term, based on fundamental data. Please be aware that our analysis may not include the most recent company announcements or qualitative information that could affect stock prices. Simply Wall St does not hold any positions in the stocks mentioned.