Does Pfeiffer Vacuum Technology (ETR:PFV) Have A Healthy Balance Sheet?

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.' 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 Pfeiffer Vacuum Technology AG (ETR:PFV) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Pfeiffer Vacuum Technology

What Is Pfeiffer Vacuum Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Pfeiffer Vacuum Technology had €50.0m of debt in June 2021, down from €60.0m, one year before. But it also has €123.8m in cash to offset that, meaning it has €73.8m net cash.

How Strong Is Pfeiffer Vacuum Technology's Balance Sheet?

According to the last reported balance sheet, Pfeiffer Vacuum Technology had liabilities of €166.3m due within 12 months, and liabilities of €131.4m due beyond 12 months. On the other hand, it had cash of €123.8m and €152.5m worth of receivables due within a year. So it has liabilities totalling €21.4m more than its cash and near-term receivables, combined.

Having regard to Pfeiffer Vacuum Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.80b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Pfeiffer Vacuum Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Pfeiffer Vacuum Technology has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pfeiffer Vacuum Technology's ability to maintain a healthy balance sheet going forward. 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. While Pfeiffer Vacuum Technology 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. In the last three years, Pfeiffer Vacuum Technology's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about Pfeiffer Vacuum Technology's liabilities, but we can be reassured by the fact it has has net cash of €73.8m. And we liked the look of last year's 61% year-on-year EBIT growth. So is Pfeiffer Vacuum Technology'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 Pfeiffer Vacuum Technology, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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