Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Camtek Ltd. (NASDAQ:CAMT) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, 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 capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Camtek's Debt?

The chart below, which you can click on for greater detail, shows that Camtek had US$197.4m in debt in June 2024; about the same as the year before. However, it does have US$366.1m in cash offsetting this, leading to net cash of US$168.7m.

How Healthy Is Camtek's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Camtek had liabilities of US$107.5m due within 12 months and liabilities of US$213.2m due beyond that. On the other hand, it had cash of US$366.1m and US$89.2m worth of receivables due within a year. So it can boast US$134.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Camtek could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Camtek has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Camtek grew its EBIT by 19% last year, making its debt load easier to handle. 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 Camtek'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Camtek 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, Camtek generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Camtek has net cash of US$168.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$108m, being 95% of its EBIT. So is Camtek's debt a risk? It doesn't seem so to us. 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 instance, we've identified 2 warning signs for Camtek that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.