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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Vishay Intertechnology, Inc. (NYSE:VSH) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Vishay Intertechnology's Debt?
You can click the graphic below for the historical numbers, but it shows that as of October 2021 Vishay Intertechnology had US$454.8m of debt, an increase on US$392.3m, over one year. However, it does have US$915.9m in cash offsetting this, leading to net cash of US$461.1m.
How Strong Is Vishay Intertechnology's Balance Sheet?
The latest balance sheet data shows that Vishay Intertechnology had liabilities of US$645.7m due within a year, and liabilities of US$1.05b falling due after that. Offsetting this, it had US$915.9m in cash and US$378.5m in receivables that were due within 12 months. So its liabilities total US$401.6m more than the combination of its cash and short-term receivables.
Of course, Vishay Intertechnology has a market capitalization of US$2.96b, so these liabilities are probably manageable. 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, Vishay Intertechnology also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Vishay Intertechnology grew its EBIT by 116% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vishay Intertechnology 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vishay Intertechnology 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 Intertechnology recorded free cash flow worth 62% 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
While Vishay Intertechnology does have more liabilities than liquid assets, it also has net cash of US$461.1m. And it impressed us with its EBIT growth of 116% over the last year. So we don't think Vishay Intertechnology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Vishay Intertechnology you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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