These 4 metrics indicate that MKS Instruments (NASDAQ: MKSI) is using debt safely

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, MKS Instruments, Inc. (NASDAQ: MKSI) is in debt. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels together.

See our latest review for MKS Instruments

What is the debt of MKS Instruments?

As you can see below, MKS Instruments owed US $ 833.2 million in debt as of March 2021, roughly the same as the year before. You can click on the graph for more details. However, it has US $ 909.5 million in cash offsetting this, leading to net cash of US $ 76.3 million.

NasdaqGS: MKSI History of debt to equity July 2, 2021

How strong is MKS Instruments’ balance sheet?

Zooming in on the latest balance sheet data, we can see that MKS Instruments had a liability of US $ 371.9 million due within 12 months and a liability of US $ 1.18 billion beyond. On the other hand, he had $ 909.5 million in cash and $ 424.3 million in receivables due within a year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 215.1 million.

Considering that MKS Instruments has a market capitalization of US $ 9.45 billion, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite its notable liabilities, MKS Instruments has a net cash position, so it is fair to say that it does not have a heavy debt load!

On top of that, MKS Instruments has increased its EBIT by 78% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future earnings, more than anything, that will determine MKS Instruments’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. While MKS Instruments has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Over the past three years, MKS Instruments has recorded free cash flow of 78% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.

In summary

We could understand if investors are concerned about the liabilities of MKS Instruments, but we can take comfort in the fact that it has net cash of $ 76.3 million. And it has impressed us with its 78% EBIT growth over the past year. We therefore do not believe that the use of debt by MKS Instruments is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – MKS Instruments has 1 warning sign we think you should be aware.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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