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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Cohu, Inc. (NASDAQ:COHU) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Cohu's Net Debt?

The image below, which you can click on for greater detail, shows that Cohu had debt of US$10.5m at the end of September 2024, a reduction from US$41.4m over a year. But it also has US$269.2m in cash to offset that, meaning it has US$258.7m net cash.

A Look At Cohu's Liabilities

The latest balance sheet data shows that Cohu had liabilities of US$85.0m due within a year, and liabilities of US$62.8m falling due after that. Offsetting these obligations, it had cash of US$269.2m as well as receivables valued at US$91.9m due within 12 months. So it actually has US$213.4m more liquid assets than total liabilities.

This excess liquidity suggests that Cohu is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Cohu boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Cohu'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.

Over 12 months, Cohu made a loss at the EBIT level, and saw its revenue drop to US$445m, which is a fall of 36%. That makes us nervous, to say the least.

So How Risky Is Cohu?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cohu had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$4.3m of cash and made a loss of US$50m. With only US$258.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Cohu I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.