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 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 can see that Interroll Holding AG (VTX:INRN) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
Check out our latest analysis for Interroll Holding
What Is Interroll Holding's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Interroll Holding had CHF21.1m of debt, an increase on CHF206.0k, over one year. However, it does have CHF71.7m in cash offsetting this, leading to net cash of CHF50.6m.
How Strong Is Interroll Holding's Balance Sheet?
According to the last reported balance sheet, Interroll Holding had liabilities of CHF199.4m due within 12 months, and liabilities of CHF29.3m due beyond 12 months. Offsetting these obligations, it had cash of CHF71.7m as well as receivables valued at CHF133.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF23.8m.
Having regard to Interroll Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF3.31b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Interroll Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Interroll Holding has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Interroll Holding'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Interroll Holding 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 most recent three years, Interroll Holding recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Interroll Holding has CHF50.6m in net cash. And we liked the look of last year's 46% year-on-year EBIT growth. So is Interroll Holding's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Interroll Holding's earnings per share history for free.
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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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.
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About SWX:INRN
Interroll Holding
Provides material handling solutions in Germany, rest of Europe, the Middle East, Africa, the United States, rest of the Americas, China, and rest of the Asia- Pacific.
Flawless balance sheet, good value and pays a dividend.
