Is INFICON Holding (VTX:IFCN) A Risky Investment?

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.' 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. Importantly, INFICON Holding AG (VTX:IFCN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for INFICON Holding

What Is INFICON Holding's Net Debt?

The image below, which you can click on for greater detail, shows that INFICON Holding had debt of US$10.8m at the end of December 2021, a reduction from US$19.2m over a year. But it also has US$65.6m in cash to offset that, meaning it has US$54.9m net cash.

How Healthy Is INFICON Holding's Balance Sheet?

According to the last reported balance sheet, INFICON Holding had liabilities of US$100.8m due within 12 months, and liabilities of US$11.7m due beyond 12 months. Offsetting this, it had US$65.6m in cash and US$82.1m in receivables that were due within 12 months. So it actually has US$35.2m more liquid assets than total liabilities.

Having regard to INFICON Holding'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$1.92b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that INFICON Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that INFICON Holding has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. 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 INFICON Holding 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While INFICON Holding 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, INFICON Holding recorded free cash flow worth 58% 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.

Summing up

While it is always sensible to investigate a company's debt, in this case INFICON Holding has US$54.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 62% year-on-year EBIT growth. So is INFICON Holding's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with INFICON Holding .

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.

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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.