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 Keysight Technologies, Inc. (NYSE:KEYS) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Keysight Technologies's Debt?
As you can see below, Keysight Technologies had US$1.79b of debt, at April 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.89b in cash, so it actually has US$94.0m net cash.
How Strong Is Keysight Technologies' Balance Sheet?
According to the last reported balance sheet, Keysight Technologies had liabilities of US$1.36b due within 12 months, and liabilities of US$2.63b due beyond 12 months. On the other hand, it had cash of US$1.89b and US$803.0m worth of receivables due within a year. So it has liabilities totalling US$1.30b more than its cash and near-term receivables, combined.
Given Keysight Technologies has a humongous market capitalization of US$30.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Keysight Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Keysight Technologies has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Keysight Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Keysight Technologies 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. Over the last three years, Keysight Technologies actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
We could understand if investors are concerned about Keysight Technologies's liabilities, but we can be reassured by the fact it has has net cash of US$94.0m. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in US$939m. So we don't think Keysight Technologies's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Keysight Technologies is showing 1 warning sign in our investment analysis , you should know about...
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.
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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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