These 4 Measures Indicate That Visteon (NASDAQ:VC) Is Using Debt Reasonably Well

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. Importantly, Visteon Corporation (NASDAQ:VC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Visteon

What Is Visteon's Debt?

The chart below, which you can click on for greater detail, shows that Visteon had US$349.0m in debt in March 2022; about the same as the year before. But it also has US$402.0m in cash to offset that, meaning it has US$53.0m net cash.

How Strong Is Visteon's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Visteon had liabilities of US$849.0m due within 12 months and liabilities of US$752.0m due beyond that. Offsetting these obligations, it had cash of US$402.0m as well as receivables valued at US$672.0m due within 12 months. So its liabilities total US$527.0m more than the combination of its cash and short-term receivables.

Since publicly traded Visteon shares are worth a total of US$3.00b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Visteon boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Visteon grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Visteon 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Visteon has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Visteon recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Visteon's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$53.0m. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't have any problem with Visteon's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Visteon is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.