Is Interroll Holding (VTX:INRN) Using Too Much Debt?

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. 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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Interroll Holding

What Is Interroll Holding's Debt?

As you can see below, at the end of December 2021, Interroll Holding had CHF17.2m of debt, up from CHF1.0k a year ago. Click the image for more detail. But on the other hand it also has CHF68.5m in cash, leading to a CHF51.3m net cash position.

How Healthy Is Interroll Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Interroll Holding had liabilities of CHF169.6m due within 12 months and liabilities of CHF23.5m due beyond that. On the other hand, it had cash of CHF68.5m and CHF107.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF16.8m.

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 CHF2.20b 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!

Fortunately, Interroll Holding grew its EBIT by 4.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Interroll Holding produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. 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 CHF51.3m in net cash. So we are not troubled with Interroll Holding's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Interroll Holding (1 is a bit concerning) you should be aware of.

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.