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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that II-VI Incorporated (NASDAQ:IIVI) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for II-VI

What Is II-VI's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 II-VI had debt of US$2.30b, up from US$1.38b in one year. However, its balance sheet shows it holds US$2.58b in cash, so it actually has US$281.9m net cash.

How Strong Is II-VI's Balance Sheet?

The latest balance sheet data shows that II-VI had liabilities of US$1.27b due within a year, and liabilities of US$2.19b falling due after that. Offsetting this, it had US$2.58b in cash and US$700.3m in receivables that were due within 12 months. So its liabilities total US$178.9m more than the combination of its cash and short-term receivables.

Given II-VI has a market capitalization of US$5.68b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, II-VI boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw II-VI grow its EBIT by 3.0% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.