Keysight Technologies (NYSE:KEYS) Seems To Use Debt Rather Sparingly
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 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. As with many other companies Keysight Technologies, Inc. (NYSE:KEYS) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Keysight Technologies
How Much Debt Does Keysight Technologies Carry?
The chart below, which you can click on for greater detail, shows that Keysight Technologies had US$1.79b in debt in July 2021; about the same as the year before. But it also has US$2.15b in cash to offset that, meaning it has US$362.0m net cash.
How Strong Is Keysight Technologies' Balance Sheet?
According to the last reported balance sheet, Keysight Technologies had liabilities of US$1.20b due within 12 months, and liabilities of US$2.86b due beyond 12 months. Offsetting these obligations, it had cash of US$2.15b as well as receivables valued at US$677.0m due within 12 months. So its liabilities total US$1.22b more than the combination of its cash and short-term receivables.
Since publicly traded Keysight Technologies shares are worth a very impressive total of US$32.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Keysight Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Keysight Technologies has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Keysight Technologies 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Keysight Technologies 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. Happily for any shareholders, Keysight Technologies actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
We could understand if investors are concerned about Keysight Technologies's liabilities, but we can be reassured by the fact it has has net cash of US$362.0m. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in US$1.2b. So is Keysight Technologies's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Keysight Technologies , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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