Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 MSA Safety Incorporated (NYSE:MSA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 MSA Safety's Net Debt?

The image below, which you can click on for greater detail, shows that MSA Safety had debt of US$508.0m at the end of December 2024, a reduction from US$601.7m over a year. However, because it has a cash reserve of US$164.6m, its net debt is less, at about US$343.5m.

How Healthy Is MSA Safety's Balance Sheet?

We can see from the most recent balance sheet that MSA Safety had liabilities of US$288.1m falling due within a year, and liabilities of US$774.4m due beyond that. Offsetting these obligations, it had cash of US$164.6m as well as receivables valued at US$279.2m due within 12 months. So its liabilities total US$618.7m more than the combination of its cash and short-term receivables.

Given MSA Safety has a market capitalization of US$5.88b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

Check out our latest analysis for MSA Safety

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

MSA Safety's net debt is only 0.71 times its EBITDA. And its EBIT covers its interest expense a whopping 14.1 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, MSA Safety grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MSA Safety 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, MSA Safety recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, MSA Safety's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that MSA Safety can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that MSA Safety insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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