Does BELIMO Holding (VTX:BEAN) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies BELIMO Holding AG (VTX:BEAN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for BELIMO Holding

How Much Debt Does BELIMO Holding Carry?

As you can see below, at the end of June 2021, BELIMO Holding had CHF13.4m of debt, up from CHF12.4m a year ago. Click the image for more detail. However, it does have CHF124.0m in cash offsetting this, leading to net cash of CHF110.6m.

A Look At BELIMO Holding's Liabilities

According to the last reported balance sheet, BELIMO Holding had liabilities of CHF105.4m due within 12 months, and liabilities of CHF17.8m due beyond 12 months. Offsetting these obligations, it had cash of CHF124.0m as well as receivables valued at CHF120.9m due within 12 months. So it actually has CHF121.7m more liquid assets than total liabilities.

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

And we also note warmly that BELIMO Holding grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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. During the last three years, BELIMO Holding produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. 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 CHF110.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CHF110m, being 78% of its EBIT. So we don't think BELIMO Holding's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of BELIMO Holding's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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