Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 Precision Group, Inc. (NYSE:VPG) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Vishay Precision Group Carry?
The image below, which you can click on for greater detail, shows that Vishay Precision Group had debt of US$23.7m at the end of September 2019, a reduction from US$27.9m over a year. However, it does have US$101.3m in cash offsetting this, leading to net cash of US$77.6m.
How Healthy 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!
Vishay Precision Group’s EBIT was pretty flat over the last year, but that shouldn’t be an issue given the it doesn’t have a lot of debt. 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 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 cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company’s debt, in this case Vishay Precision Group has US$77.6m in net cash and a decent-looking balance sheet. So is Vishay Precision Group’s debt a risk? It doesn’t seem so to us. Over time, share prices tend to follow earnings per share, so if you’re interested in Vishay Precision Group, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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