David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, BELIMO Holding AG (VTX:BEAN) does carry debt. But is this debt a concern to shareholders?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
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How Much Debt Does BELIMO Holding Carry?
You can click the graphic below for the historical numbers, but it shows that BELIMO Holding had CHF7.10m of debt in June 2022, down from CHF13.4m, one year before. However, it does have CHF83.9m in cash offsetting this, leading to net cash of CHF76.8m.
How Strong Is BELIMO Holding's Balance Sheet?
The latest balance sheet data shows that BELIMO Holding had liabilities of CHF134.7m due within a year, and liabilities of CHF16.2m falling due after that. Offsetting this, it had CHF83.9m in cash and CHF133.0m in receivables that were due within 12 months. So it can boast CHF66.0m more liquid assets than total liabilities.
Having regard to BELIMO Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CHF4.83b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that BELIMO Holding has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that BELIMO Holding grew its EBIT at 15% over the last year, further increasing its ability to manage 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 BELIMO Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. BELIMO Holding 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, BELIMO Holding recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that BELIMO Holding has net cash of CHF76.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in CHF76m. So is BELIMO Holding's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for BELIMO Holding that you should be aware of before investing here.
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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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.
About SWX:BEAN
BELIMO Holding
Develops, produces, distributes, and sells damper actuators, control valves, sensors, and meters for heating, ventilation, and air conditioning systems in Europe, the Middle East, Africa, the Americas, and the Asia Pacific.
Outstanding track record with excellent balance sheet.