Burkhalter Holding (VTX:BRKN) Has A Pretty Healthy Balance Sheet

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. As with many other companies Burkhalter Holding AG (VTX:BRKN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Burkhalter Holding

What Is Burkhalter Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that Burkhalter Holding had CHF12.6m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds CHF43.1m in cash, so it actually has CHF30.4m net cash.

How Healthy Is Burkhalter Holding's Balance Sheet?

According to the last reported balance sheet, Burkhalter Holding had liabilities of CHF115.0m due within 12 months, and liabilities of CHF24.1m due beyond 12 months. On the other hand, it had cash of CHF43.1m and CHF122.3m worth of receivables due within a year. So it actually has CHF26.2m more liquid assets than total liabilities.

This surplus suggests that Burkhalter Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Burkhalter Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Burkhalter Holding's load is not too heavy, because its EBIT was down 28% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Burkhalter 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Burkhalter 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, Burkhalter Holding generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Burkhalter Holding has CHF30.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CHF21m. So we don't have any problem with Burkhalter Holding's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Burkhalter Holding (1 can't be ignored) you should be aware of.

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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