Vishay Intertechnology (NYSE:VSH) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, '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. We can see that Vishay Intertechnology, Inc. (NYSE:VSH) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Vishay Intertechnology

What Is Vishay Intertechnology's Net Debt?

As you can see below, at the end of March 2024, Vishay Intertechnology had US$819.4m of debt, up from US$566.8m a year ago. Click the image for more detail. But it also has US$834.0m in cash to offset that, meaning it has US$14.6m net cash.

How Healthy Is Vishay Intertechnology's Balance Sheet?

We can see from the most recent balance sheet that Vishay Intertechnology had liabilities of US$709.3m falling due within a year, and liabilities of US$1.37b due beyond that. Offsetting this, it had US$834.0m in cash and US$411.2m in receivables that were due within 12 months. So it has liabilities totalling US$831.7m more than its cash and near-term receivables, combined.

Vishay Intertechnology has a market capitalization of US$3.11b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Vishay Intertechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Vishay Intertechnology's load is not too heavy, because its EBIT was down 42% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vishay Intertechnology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Vishay Intertechnology does have more liabilities than liquid assets, it also has net cash of US$14.6m. So although we see some areas for improvement, we're not too worried about Vishay Intertechnology's balance sheet. 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. To that end, you should learn about the 3 warning signs we've spotted with Vishay Intertechnology (including 1 which shouldn't be ignored) .

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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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.