Bobst Group (VTX:BOBNN) Takes On Some Risk With Its Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Bobst Group SA (VTX:BOBNN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bobst Group

What Is Bobst Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Bobst Group had debt of CHF353.2m, up from CHF299.9m in one year. However, its balance sheet shows it holds CHF357.1m in cash, so it actually has CHF3.90m net cash.

How Strong Is Bobst Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bobst Group had liabilities of CHF612.3m due within 12 months and liabilities of CHF418.8m due beyond that. On the other hand, it had cash of CHF357.1m and CHF322.0m worth of receivables due within a year. So it has liabilities totalling CHF352.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Bobst Group is worth CHF1.08b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Bobst Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Bobst Group's EBIT was down 83% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bobst Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bobst Group 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 last three years, Bobst Group reported free cash flow worth 8.9% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

Although Bobst Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF3.90m. Despite its cash we think that Bobst Group seems to struggle to grow its EBIT, so we are wary of the stock. 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. We've identified 3 warning signs with Bobst Group , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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