Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. 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 Vishay Precision Group, Inc. (NYSE:VPG) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Vishay Precision Group's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Vishay Precision Group had debt of US$23.7m, up from US$27.9 in one year. But it also has US$101.3m in cash to offset that, meaning it has US$77.6m net cash.
How Strong Is Vishay Precision Group's Balance Sheet?
The latest balance sheet data shows that Vishay Precision Group had liabilities of US$51.5m due within a year, and liabilities of US$56.6m falling due after that. Offsetting these obligations, it had cash of US$101.3m as well as receivables valued at US$44.4m due within 12 months. So it can boast US$37.6m more liquid assets than total liabilities.
This surplus suggests that Vishay Precision Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vishay Precision Group boasts net cash, so it's fair to say it does not have a heavy debt load!
While Vishay Precision Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Vishay Precision Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Vishay Precision Group 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, Vishay Precision Group recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that Vishay Precision Group has net cash of US$77.6m, as well as more liquid assets than liabilities. So we don't think Vishay Precision Group's use of debt is risky. 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 Vishay Precision Group'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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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