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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.' 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 can see that MKS Instruments, Inc. (NASDAQ:MKSI) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
What Is MKS Instruments's Debt?
The chart below, which you can click on for greater detail, shows that MKS Instruments had US$826.2m in debt in September 2021; about the same as the year before. But it also has US$879.6m in cash to offset that, meaning it has US$53.4m net cash.
How Strong Is MKS Instruments' Balance Sheet?
The latest balance sheet data shows that MKS Instruments had liabilities of US$437.1m due within a year, and liabilities of US$1.20b falling due after that. Offsetting this, it had US$879.6m in cash and US$447.2m in receivables that were due within 12 months. So its liabilities total US$310.5m more than the combination of its cash and short-term receivables.
Of course, MKS Instruments has a market capitalization of US$8.89b, 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. Despite its noteworthy liabilities, MKS Instruments boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, MKS Instruments grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. 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 MKS Instruments'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MKS Instruments 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. During the last three years, MKS Instruments produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
We could understand if investors are concerned about MKS Instruments's liabilities, but we can be reassured by the fact it has has net cash of US$53.4m. And we liked the look of last year's 78% year-on-year EBIT growth. So we don't think MKS Instruments's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in MKS Instruments, you may well want to click here to check an interactive graph of its earnings per share history.
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. 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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