Is Keysight Technologies (NYSE:KEYS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Keysight Technologies, Inc. (NYSE:KEYS) does carry debt. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Keysight Technologies

What Is Keysight Technologies's Net Debt?

The chart below, which you can click on for greater detail, shows that Keysight Technologies had US$1.79b in debt in July 2023; about the same as the year before. But on the other hand it also has US$2.57b in cash, leading to a US$778.0m net cash position.

How Healthy Is Keysight Technologies' Balance Sheet?

We can see from the most recent balance sheet that Keysight Technologies had liabilities of US$1.34b falling due within a year, and liabilities of US$2.59b due beyond that. Offsetting this, it had US$2.57b in cash and US$893.0m in receivables that were due within 12 months. So it has liabilities totalling US$464.0m more than its cash and near-term receivables, combined.

Since publicly traded Keysight Technologies shares are worth a very impressive total of US$22.9b, 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. While it does have liabilities worth noting, Keysight Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Keysight Technologies has increased its EBIT by 6.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Keysight Technologies'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Keysight Technologies 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, Keysight Technologies generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Keysight Technologies has US$778.0m in net cash. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in US$1.2b. So we don't think Keysight Technologies's use of debt is risky. We'd be very excited to see if Keysight Technologies insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.