Pfeiffer Vacuum Technology (ETR:PFV) Seems To Use Debt Rather Sparingly

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. We note that Pfeiffer Vacuum Technology AG (ETR:PFV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Pfeiffer Vacuum Technology

What Is Pfeiffer Vacuum Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Pfeiffer Vacuum Technology had debt of €5.00m at the end of March 2022, a reduction from €60.0m over a year. But on the other hand it also has €105.6m in cash, leading to a €100.6m net cash position.

A Look At Pfeiffer Vacuum Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Pfeiffer Vacuum Technology had liabilities of €178.8m due within 12 months and liabilities of €81.0m due beyond that. On the other hand, it had cash of €105.6m and €145.2m worth of receivables due within a year. So its liabilities total €9.03m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Pfeiffer Vacuum Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €1.58b 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 83%, 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 Pfeiffer Vacuum Technology 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. 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. In the last three years, Pfeiffer Vacuum Technology's free cash flow amounted to 47% of its EBIT, less 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 €100.6m in net cash. And it impressed us with its EBIT growth of 83% over the last year. So is Pfeiffer Vacuum Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pfeiffer Vacuum Technology is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.