These 4 Measures Indicate That INFICON Holding (VTX:IFCN) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that INFICON Holding AG (VTX:IFCN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for INFICON Holding

How Much Debt Does INFICON Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 INFICON Holding had US$88.4m of debt, an increase on US$64.2m, over one year. However, it does have US$73.4m in cash offsetting this, leading to net debt of about US$14.9m.

How Healthy Is INFICON Holding's Balance Sheet?

According to the last reported balance sheet, INFICON Holding had liabilities of US$187.4m due within 12 months, and liabilities of US$9.98m due beyond 12 months. Offsetting these obligations, it had cash of US$73.4m as well as receivables valued at US$95.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$29.0m.

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$2.80b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, INFICON Holding has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

INFICON Holding has a low net debt to EBITDA ratio of only 0.11. And its EBIT easily covers its interest expense, being 52.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that INFICON Holding grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, INFICON Holding recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, INFICON Holding's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Looking at the bigger picture, we think INFICON Holding's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. For example, we've discovered 1 warning sign for INFICON Holding that you should be aware of before investing here.

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.