The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Keysight Technologies, Inc. (NYSE:KEYS) makes use of debt. 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 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. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Keysight Technologies
What Is Keysight Technologies’s Net Debt?
As you can see below, Keysight Technologies had US$1.79b of debt, at January 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.89b in cash to offset that, meaning it has US$97.0m net cash.
How Healthy Is Keysight Technologies’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Keysight Technologies had liabilities of US$1.12b due within 12 months and liabilities of US$2.83b due beyond that. Offsetting this, it had US$1.89b in cash and US$654.0m in receivables that were due within 12 months. So its liabilities total US$1.42b more than the combination of its cash and short-term receivables.
Of course, Keysight Technologies has a titanic market capitalization of US$26.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Keysight Technologies boasts net cash, so it’s fair to say it does not have a heavy debt load!
Keysight Technologies’s EBIT was pretty flat over the last year, but that shouldn’t be an issue given the it doesn’t have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Keysight Technologies’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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Keysight Technologies 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. Happily for any shareholders, Keysight Technologies actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Keysight Technologies has US$97.0m in net cash. And it impressed us with free cash flow of US$1.0b, being 106% of its EBIT. So we don’t think Keysight Technologies’s use of debt is risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For example – Keysight Technologies has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. 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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