Pfeiffer Vacuum Technology (ETR:PFV) Has A Rock Solid Balance Sheet

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.' 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. Importantly, Pfeiffer Vacuum Technology AG (ETR:PFV) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, Pfeiffer Vacuum Technology had €40.0m of debt at September 2021, down from €60.1m a year prior. However, it does have €134.3m in cash offsetting this, leading to net cash of €94.3m.

How Healthy Is Pfeiffer Vacuum Technology's Balance Sheet?

According to the last reported balance sheet, Pfeiffer Vacuum Technology had liabilities of €181.6m due within 12 months, and liabilities of €121.3m due beyond 12 months. Offsetting this, it had €134.3m in cash and €151.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €17.6m.

Having regard to Pfeiffer Vacuum Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €2.14b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Pfeiffer Vacuum Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Pfeiffer Vacuum Technology grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Pfeiffer Vacuum Technology 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. During the last three years, Pfeiffer Vacuum Technology produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €94.3m. And it impressed us with its EBIT growth of 71% over the last year. So is Pfeiffer Vacuum Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Pfeiffer Vacuum Technology's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.