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Is Plexus (NASDAQ:PLXS) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Plexus Corp. (NASDAQ:PLXS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

Check out our latest analysis for Plexus

What Is Plexus's Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2020 Plexus had US$294.5m of debt, an increase on US$187.6m, over one year. But it also has US$296.5m in cash to offset that, meaning it has US$2.08m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Plexus's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Plexus had liabilities of US$1.04b due within 12 months and liabilities of US$306.1m due beyond that. Offsetting this, it had US$296.5m in cash and US$635.8m in receivables that were due within 12 months. So it has liabilities totalling US$411.4m more than its cash and near-term receivables, combined.

Of course, Plexus has a market capitalization of US$2.11b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Plexus also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Plexus has increased its EBIT by 4.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Plexus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Plexus 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. Looking at the most recent three years, Plexus recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Plexus does have more liabilities than liquid assets, it also has net cash of US$2.08m. On top of that, it increased its EBIT by 4.1% in the last twelve months. So we are not troubled with Plexus's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Plexus , and understanding them should be part of your investment process.

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.

This article by Simply Wall St is general in nature. 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.

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