Here's Why Bobst Group (VTX:BOBNN) Has A Meaningful Debt Burden

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Bobst Group SA (VTX:BOBNN) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bobst Group

How Much Debt Does Bobst Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Bobst Group had CHF353.2m of debt, an increase on CHF299.9m, over one year. But it also has CHF357.1m in cash to offset that, meaning it has CHF3.90m net cash.

How Healthy Is Bobst Group's Balance Sheet?

We can see from the most recent balance sheet that Bobst Group had liabilities of CHF612.3m falling due within a year, 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.

While this might seem like a lot, it is not so bad since Bobst Group has a market capitalization of CHF1.05b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. 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 Bobst Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bobst Group 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 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. Be aware that Bobst Group is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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