We Think BELIMO Holding (VTX:BEAN) Can Stay On Top Of Its Debt

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. 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for BELIMO Holding

What Is BELIMO Holding's Net Debt?

As you can see below, at the end of December 2022, BELIMO Holding had CHF1.80m of debt, up from CHF1.23m a year ago. Click the image for more detail. But it also has CHF111.8m in cash to offset that, meaning it has CHF110.0m net cash.

How Healthy Is BELIMO Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BELIMO Holding had liabilities of CHF133.6m due within 12 months and liabilities of CHF16.6m due beyond that. Offsetting this, it had CHF111.8m in cash and CHF119.4m in receivables that were due within 12 months. So it can boast CHF81.0m 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 CHF5.09b 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.

The good news is that BELIMO Holding has increased its EBIT by 4.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. 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 BELIMO Holding has net cash of CHF110.0m, as well as more liquid assets than liabilities. So is BELIMO Holding's debt a risk? It doesn't seem so to us. 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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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.