Is Interroll Holding (VTX:INRN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Interroll Holding AG (VTX:INRN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Interroll Holding

What Is Interroll Holding's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Interroll Holding had debt of CHF21.4m, up from CHF206.0k in one year. However, its balance sheet shows it holds CHF71.7m in cash, so it actually has CHF50.3m net cash.

How Strong Is Interroll Holding's Balance Sheet?

We can see from the most recent balance sheet that Interroll Holding had liabilities of CHF199.4m falling due within a year, and liabilities of CHF29.3m due beyond that. Offsetting these obligations, it had cash of CHF71.7m as well as receivables valued at CHF133.2m due within 12 months. So its liabilities total CHF23.8m more than the combination of its cash and short-term receivables.

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 CHF3.75b company is short on cash, but still worth keeping an eye on the 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!

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. 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'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 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. 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

We could understand if investors are concerned about Interroll Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF50.3m. And it impressed us with its EBIT growth of 46% over the last year. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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