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.' 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 can see that Vishay Precision Group, Inc. (NYSE:VPG) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Vishay Precision Group's Net Debt?
The image below, which you can click on for greater detail, shows that Vishay Precision Group had debt of US$40.6m at the end of December 2020, a reduction from US$44.5m over a year. But on the other hand it also has US$98.4m in cash, leading to a US$57.8m net cash position.
How Healthy Is Vishay Precision Group's Balance Sheet?
According to the last reported balance sheet, Vishay Precision Group had liabilities of US$47.5m due within 12 months, and liabilities of US$96.5m due beyond 12 months. Offsetting this, it had US$98.4m in cash and US$45.3m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Vishay Precision Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$426.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Vishay Precision Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, Vishay Precision Group's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vishay Precision Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Vishay Precision Group 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. Over the most recent three years, Vishay Precision Group recorded free cash flow worth 54% 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.
We could understand if investors are concerned about Vishay Precision Group's liabilities, but we can be reassured by the fact it has has net cash of US$57.8m. So we don't have any problem with Vishay Precision Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Vishay Precision Group you should be aware of.
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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