Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that BELIMO Holding AG (VTX:BEAN) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does BELIMO Holding Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 BELIMO Holding had CHF1.66m of debt, an increase on CHF272.0k, over one year. However, its balance sheet shows it holds CHF164.9m in cash, so it actually has CHF163.3m net cash.
A Look At BELIMO Holding's Liabilities
According to the last reported balance sheet, BELIMO Holding had liabilities of CHF78.4m due within 12 months, and liabilities of CHF15.8m due beyond 12 months. Offsetting these obligations, it had cash of CHF164.9m as well as receivables valued at CHF86.5m due within 12 months. So it can boast CHF157.3m more liquid assets than total liabilities.
This short term liquidity is a sign that BELIMO Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, BELIMO Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, BELIMO Holding's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BELIMO Holding 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While BELIMO Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, BELIMO Holding generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While we empathize with investors who find debt concerning, you should keep in mind that BELIMO Holding has net cash of CHF163.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in CHF97m. So we don't think BELIMO Holding's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for BELIMO Holding that you should be aware of.
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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