Vishay Intertechnology (NYSE:VSH) Seems To Use Debt Quite Sensibly

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

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vishay Intertechnology

What Is Vishay Intertechnology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Vishay Intertechnology had debt of US$817.3m, up from US$458.1m in one year. But it also has US$1.17b in cash to offset that, meaning it has US$356.9m net cash.

How Strong Is Vishay Intertechnology's Balance Sheet?

According to the last reported balance sheet, Vishay Intertechnology had liabilities of US$716.9m due within 12 months, and liabilities of US$1.38b due beyond 12 months. Offsetting this, it had US$1.17b in cash and US$442.6m in receivables that were due within 12 months. So its liabilities total US$481.9m more than the combination of its cash and short-term receivables.

Of course, Vishay Intertechnology has a market capitalization of US$3.01b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Vishay Intertechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Vishay Intertechnology's EBIT dived 10%, 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 Intertechnology'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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$356.9m. So we are not troubled with Vishay Intertechnology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Vishay Intertechnology (1 is a bit unpleasant) 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.