Pfeiffer Vacuum Technology (ETR:PFV) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Pfeiffer Vacuum Technology AG (ETR:PFV) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Pfeiffer Vacuum Technology

What Is Pfeiffer Vacuum Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Pfeiffer Vacuum Technology had €60.1m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds €115.1m in cash, so it actually has €55.1m net cash.

How Strong Is Pfeiffer Vacuum Technology's Balance Sheet?

According to the last reported balance sheet, Pfeiffer Vacuum Technology had liabilities of €121.9m due within 12 months, and liabilities of €140.9m due beyond 12 months. On the other hand, it had cash of €115.1m and €107.3m worth of receivables due within a year. So its liabilities total €40.3m more than the combination of its cash and short-term receivables.

Given Pfeiffer Vacuum Technology has a market capitalization of €1.76b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Pfeiffer Vacuum Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Pfeiffer Vacuum Technology's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Pfeiffer Vacuum Technology 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.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pfeiffer Vacuum Technology has €55.1m in net cash. So we are not troubled with Pfeiffer Vacuum Technology's debt use. 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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