We Think Pfeiffer Vacuum Technology (ETR:PFV) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that PFV is potentially undervalued!

How Much Debt Does Pfeiffer Vacuum Technology Carry?

The image below, which you can click on for greater detail, shows that Pfeiffer Vacuum Technology had debt of €30.0m at the end of June 2022, a reduction from €50.0m over a year. But on the other hand it also has €74.0m in cash, leading to a €44.0m net cash position.

A Look At Pfeiffer Vacuum Technology's Liabilities

The latest balance sheet data shows that Pfeiffer Vacuum Technology had liabilities of €217.7m due within a year, and liabilities of €54.2m falling due after that. Offsetting these obligations, it had cash of €74.0m as well as receivables valued at €158.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €39.2m.

Since publicly traded Pfeiffer Vacuum Technology shares are worth a total of €1.39b, it seems unlikely that this level of liabilities would be a major 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 addition to that, we're happy to report that Pfeiffer Vacuum Technology has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Looking at the most recent three years, Pfeiffer Vacuum Technology recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pfeiffer Vacuum Technology has €44.0m in net cash. And we liked the look of last year's 44% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Pfeiffer Vacuum Technology that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.