The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 II-VI Incorporated (NASDAQ:IIVI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for II-VI

What Is II-VI's Net Debt?

As you can see below, II-VI had US$1.40b of debt at September 2021, down from US$1.53b a year prior. But on the other hand it also has US$1.56b in cash, leading to a US$158.8m net cash position.

A Look At II-VI's Liabilities

We can see from the most recent balance sheet that II-VI had liabilities of US$1.03b falling due within a year, and liabilities of US$1.29b due beyond that. Offsetting these obligations, it had cash of US$1.56b as well as receivables valued at US$663.9m due within 12 months. So its liabilities total US$97.4m more than the combination of its cash and short-term receivables.

Having regard to II-VI's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$7.00b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, II-VI also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that II-VI grew its EBIT by 114% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine II-VI's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.