Here's Why Mikron Holding (VTX:MIKN) Can Manage Its Debt Responsibly

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 note that Mikron Holding AG (VTX:MIKN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mikron Holding

What Is Mikron Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Mikron Holding had CHF3.60m of debt in December 2021, down from CHF18.5m, one year before. However, it does have CHF54.1m in cash offsetting this, leading to net cash of CHF50.5m.

How Healthy Is Mikron Holding's Balance Sheet?

The latest balance sheet data shows that Mikron Holding had liabilities of CHF114.2m due within a year, and liabilities of CHF20.7m falling due after that. Offsetting these obligations, it had cash of CHF54.1m as well as receivables valued at CHF52.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF28.3m.

This deficit isn't so bad because Mikron Holding is worth CHF112.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Mikron Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Mikron Holding turned things around in the last 12 months, delivering and EBIT of CHF18m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mikron Holding will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mikron 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. Happily for any shareholders, Mikron Holding actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Mikron Holding does have more liabilities than liquid assets, it also has net cash of CHF50.5m. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in CHF30m. So is Mikron Holding's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Mikron Holding you should be aware of, and 1 of them is a bit unpleasant.

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.

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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.