Yahoo Finance Here's Why Vishay Precision Group (NYSE:VPG) Can Manage Its Debt Responsibly
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 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 the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Vishay Precision Group
What Is Vishay Precision Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Vishay Precision Group had US$60.8m in debt in July 2022; about the same as the year before. However, its balance sheet shows it holds US$79.4m in cash, so it actually has US$18.7m net cash.
How Strong Is Vishay Precision Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Vishay Precision Group had liabilities of US$59.4m due within 12 months and liabilities of US$113.6m due beyond that. On the other hand, it had cash of US$79.4m and US$58.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$34.9m.
Since publicly traded Vishay Precision Group shares are worth a total of US$486.9m, it seems unlikely that this level of liabilities would be a major threat. 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 Precision Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Vishay Precision Group grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. 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 Precision Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Vishay Precision Group recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
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$18.7m. And we liked the look of last year's 31% year-on-year EBIT growth. So is Vishay Precision Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Vishay Precision Group, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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