MKS Instruments (NASDAQ:MKSI) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that MKS Instruments, Inc. (NASDAQ:MKSI) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for MKS Instruments

What Is MKS Instruments's Debt?

As you can see below, MKS Instruments had US$821.9m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.04b in cash to offset that, meaning it has US$220.8m net cash.

How Strong Is MKS Instruments' Balance Sheet?

We can see from the most recent balance sheet that MKS Instruments had liabilities of US$460.8m falling due within a year, and liabilities of US$1.19b due beyond that. On the other hand, it had cash of US$1.04b and US$446.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$164.3m.

Since publicly traded MKS Instruments shares are worth a total of US$6.49b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, MKS Instruments 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 MKS Instruments has boosted its EBIT by 58%, 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 MKS Instruments 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 company can only pay off debt with cold hard cash, not accounting profits. MKS Instruments 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. During the last three years, MKS Instruments produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about MKS Instruments's liabilities, but we can be reassured by the fact it has has net cash of US$220.8m. And we liked the look of last year's 58% year-on-year EBIT growth. So is MKS Instruments'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. We've identified 1 warning sign with MKS Instruments , and understanding them should be part of your investment process.

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.