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. Importantly, West Pharmaceutical Services, Inc. (NYSE:WST) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for West Pharmaceutical Services

How Much Debt Does West Pharmaceutical Services Carry?

The chart below, which you can click on for greater detail, shows that West Pharmaceutical Services had US$207.3m in debt in September 2023; about the same as the year before. But it also has US$898.6m in cash to offset that, meaning it has US$691.3m net cash.

A Look At West Pharmaceutical Services' Liabilities

We can see from the most recent balance sheet that West Pharmaceutical Services had liabilities of US$533.5m falling due within a year, and liabilities of US$353.0m due beyond that. On the other hand, it had cash of US$898.6m and US$539.0m worth of receivables due within a year. So it can boast US$551.1m more liquid assets than total liabilities.

This surplus suggests that West Pharmaceutical Services has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that West Pharmaceutical Services has more cash than debt is arguably a good indication that it can manage its debt safely.

While West Pharmaceutical Services doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 West Pharmaceutical Services'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. West Pharmaceutical Services 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 most recent three years, West Pharmaceutical Services recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that West Pharmaceutical Services has net cash of US$691.3m, as well as more liquid assets than liabilities. So we are not troubled with West Pharmaceutical Services's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in West Pharmaceutical Services, 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.