Is Conzzeta (VTX:CON) Using Too Much Debt?

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.' 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, Conzzeta AG (VTX:CON) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Conzzeta

How Much Debt Does Conzzeta Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Conzzeta had CHF7.70m of debt, an increase on CHF4.20m, over one year. However, it does have CHF273.3m in cash offsetting this, leading to net cash of CHF265.6m.

How Strong Is Conzzeta's Balance Sheet?

The latest balance sheet data shows that Conzzeta had liabilities of CHF313.8m due within a year, and liabilities of CHF40.8m falling due after that. Offsetting these obligations, it had cash of CHF273.3m as well as receivables valued at CHF232.8m due within 12 months. So it can boast CHF151.5m more liquid assets than total liabilities.

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

It is just as well that Conzzeta's load is not too heavy, because its EBIT was down 74% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Conzzeta can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Conzzeta 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. Looking at the most recent three years, Conzzeta recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Conzzeta has CHF265.6m in net cash and a decent-looking balance sheet. So we are not troubled with Conzzeta's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Conzzeta .

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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