Interroll Holding (VTX:INRN) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Interroll Holding AG (VTX:INRN) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that INRN is potentially undervalued!

What Is Interroll Holding's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Interroll Holding had debt of CHF46.6m, up from CHF21.4m in one year. However, its balance sheet shows it holds CHF67.5m in cash, so it actually has CHF20.9m net cash.

A Look At Interroll Holding's Liabilities

We can see from the most recent balance sheet that Interroll Holding had liabilities of CHF213.8m falling due within a year, and liabilities of CHF22.9m due beyond that. Offsetting these obligations, it had cash of CHF67.5m as well as receivables valued at CHF140.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF28.4m.

Having regard to Interroll 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 CHF1.49b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Interroll Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Interroll Holding has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Interroll 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Interroll 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. Looking at the most recent three years, Interroll Holding recorded free cash flow of 34% 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 look at a company's total liabilities, it is very reassuring that Interroll Holding has CHF20.9m in net cash. So we are not troubled with Interroll Holding's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Interroll Holding has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.