MKS Instruments (NASDAQ:MKSI) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that MKS Instruments, Inc. (NASDAQ:MKSI) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MKS Instruments

What Is MKS Instruments's Debt?

As you can see below, MKS Instruments had US$818.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$1.05b in cash, leading to a US$235.0m net cash position.

How Strong Is MKS Instruments' Balance Sheet?

The latest balance sheet data shows that MKS Instruments had liabilities of US$436.0m due within a year, and liabilities of US$1.19b falling due after that. Offsetting this, it had US$1.05b in cash and US$480.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$89.0m.

This state of affairs indicates that MKS Instruments' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$5.64b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, MKS Instruments also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, MKS Instruments grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MKS Instruments's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MKS Instruments 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. Over the most recent three years, MKS Instruments recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MKS Instruments has US$235.0m in net cash. And it impressed us with its EBIT growth of 38% over the last year. So is MKS Instruments's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in MKS Instruments, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.