These 4 Measures Indicate That Pfeiffer Vacuum Technology (ETR:PFV) Is Using Debt Reasonably Well

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 €60.0m in debt in March 2021; about the same as the year before. However, it does have €130.4m in cash offsetting this, leading to net cash of €70.4m.

How Healthy Is Pfeiffer Vacuum Technology's Balance Sheet?

The latest balance sheet data shows that Pfeiffer Vacuum Technology had liabilities of €145.4m due within a year, and liabilities of €148.1m falling due after that. Offsetting this, it had €130.4m in cash and €138.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €24.8m.

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 it's very unlikely that the €1.60b 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!

Fortunately, Pfeiffer Vacuum Technology grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. 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 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. In the last three years, Pfeiffer Vacuum Technology's free cash flow amounted to 44% 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 €70.4m in net cash. On top of that, it increased its EBIT by 6.4% in the last twelve months. So we don't have any problem with Pfeiffer Vacuum Technology's use of debt. 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.

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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