We Think BELIMO Holding (VTX:BEAN) Can Manage Its Debt With Ease

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.' 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 more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for BELIMO Holding

What Is BELIMO Holding's Debt?

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

The latest balance sheet data shows that BELIMO Holding had liabilities of CHF105.4m due within a year, and liabilities of CHF17.8m falling due after that. 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.

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 CHF6.59b 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.

And we also note warmly that BELIMO Holding grew its EBIT by 13% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the most recent three years, BELIMO Holding recorded free cash flow worth 78% 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 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. Over time, share prices tend to follow earnings per share, so if you're interested in BELIMO Holding, 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.