Is Vishay Intertechnology (NYSE:VSH) A Risky Investment?

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.' 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 Vishay Intertechnology, Inc. (NYSE:VSH) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Vishay Intertechnology

What Is Vishay Intertechnology's Debt?

As you can see below, at the end of April 2023, Vishay Intertechnology had US$566.8m of debt, up from US$456.5m a year ago. Click the image for more detail. However, it does have US$1.03b in cash offsetting this, leading to net cash of US$467.7m.

A Look At Vishay Intertechnology's Liabilities

According to the last reported balance sheet, Vishay Intertechnology had liabilities of US$749.3m due within 12 months, and liabilities of US$1.17b due beyond 12 months. Offsetting this, it had US$1.03b in cash and US$444.0m in receivables that were due within 12 months. So its liabilities total US$436.9m more than the combination of its cash and short-term receivables.

Since publicly traded Vishay Intertechnology shares are worth a total of US$3.56b, 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, Vishay Intertechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Vishay Intertechnology grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Vishay Intertechnology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vishay Intertechnology 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. Looking at the most recent three years, Vishay Intertechnology recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Vishay Intertechnology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$467.7m. And we liked the look of last year's 24% year-on-year EBIT growth. So is Vishay Intertechnology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Vishay Intertechnology that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.