West Pharmaceutical Services (NYSE:WST) Has A Pretty Healthy Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies West Pharmaceutical Services, Inc. (NYSE:WST) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for West Pharmaceutical Services

What Is West Pharmaceutical Services's Net Debt?

You can click the graphic below for the historical numbers, but it shows that West Pharmaceutical Services had US$209.4m of debt in September 2022, down from US$254.1m, one year before. However, its balance sheet shows it holds US$729.0m in cash, so it actually has US$519.6m net cash.

How Strong Is West Pharmaceutical Services' Balance Sheet?

We can see from the most recent balance sheet that West Pharmaceutical Services had liabilities of US$456.7m falling due within a year, and liabilities of US$389.3m due beyond that. On the other hand, it had cash of US$729.0m and US$503.6m worth of receivables due within a year. So it actually has US$386.6m more liquid assets than total liabilities.

Having regard to West Pharmaceutical Services' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$19.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, West Pharmaceutical Services boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, West Pharmaceutical Services grew its EBIT by 7.1% 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 West Pharmaceutical Services 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While West Pharmaceutical Services 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. During the last three years, West Pharmaceutical Services produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that West Pharmaceutical Services has net cash of US$519.6m, as well as more liquid assets than liabilities. So is West Pharmaceutical Services's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that West Pharmaceutical Services insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.