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. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Vishay Precision Group, Inc. (NYSE:VPG) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Vishay Precision Group’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2020 Vishay Precision Group had US$40.7m of debt, an increase on US$25.9m, over one year. But on the other hand it also has US$82.7m in cash, leading to a US$42.0m net cash position.
How Healthy Is Vishay Precision Group’s Balance Sheet?
We can see from the most recent balance sheet that Vishay Precision Group had liabilities of US$47.5m falling due within a year, and liabilities of US$78.2m due beyond that. On the other hand, it had cash of US$82.7m and US$47.0m worth of receivables due within a year. So it actually has US$4.00m more liquid assets than total liabilities.
Having regard to Vishay Precision Group’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$294.7m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Simply put, the fact that Vishay Precision Group has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Vishay Precision Group if management cannot prevent a repeat of the 42% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Vishay Precision Group 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 company can only pay off debt with cold hard cash, not accounting profits. Vishay Precision Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Vishay Precision Group recorded free cash flow worth 61% 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$42.0m, as well as more liquid assets than liabilities. So we don’t have any problem with Vishay Precision Group’s use of debt. 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. Be aware that Vishay Precision Group is showing 1 warning sign in our investment analysis , you should know about…
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. 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. Thank you for reading.