U.S. Markets close in 5 hrs 54 mins

Here's Why Pfeiffer Vacuum Technology (ETR:PFV) Can Manage Its Debt Responsibly

Simply Wall St

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 note that Pfeiffer Vacuum Technology AG (ETR:PFV) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Pfeiffer Vacuum Technology

What Is Pfeiffer Vacuum Technology's Debt?

As you can see below, Pfeiffer Vacuum Technology had €60.0m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But it also has €93.7m in cash to offset that, meaning it has €33.7m net cash.

XTRA:PFV Historical Debt, October 31st 2019

How Healthy Is Pfeiffer Vacuum Technology's Balance Sheet?

The latest balance sheet data shows that Pfeiffer Vacuum Technology had liabilities of €121.7m due within a year, and liabilities of €141.0m falling due after that. Offsetting this, it had €93.7m in cash and €97.7m in receivables that were due within 12 months. So its liabilities total €71.4m more than the combination of its cash and short-term receivables.

Since publicly traded Pfeiffer Vacuum Technology shares are worth a total of €1.39b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Pfeiffer Vacuum Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Pfeiffer Vacuum Technology has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pfeiffer Vacuum Technology 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. While Pfeiffer Vacuum Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Pfeiffer Vacuum Technology recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Pfeiffer Vacuum Technology's liabilities, but we can be reassured by the fact it has has net cash of €33.7m. So we are not troubled with Pfeiffer Vacuum Technology's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Pfeiffer Vacuum Technology's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.