CALIDA Holding (VTX:CALN) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CALIDA Holding AG (VTX:CALN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CALIDA Holding

What Is CALIDA Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 CALIDA Holding had CHF42.2m of debt, an increase on CHF31.5m, over one year. However, its balance sheet shows it holds CHF69.7m in cash, so it actually has CHF27.5m net cash.

How Strong Is CALIDA Holding's Balance Sheet?

According to the last reported balance sheet, CALIDA Holding had liabilities of CHF135.3m due within 12 months, and liabilities of CHF61.3m due beyond 12 months. On the other hand, it had cash of CHF69.7m and CHF30.6m worth of receivables due within a year. So it has liabilities totalling CHF96.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because CALIDA Holding is worth CHF224.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, CALIDA Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, CALIDA Holding saw its EBIT drop by 4.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 CALIDA 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 company can only pay off debt with cold hard cash, not accounting profits. CALIDA 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. Happily for any shareholders, CALIDA Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although CALIDA Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF27.5m. And it impressed us with free cash flow of CHF43m, being 110% of its EBIT. So we don't have any problem with CALIDA Holding's use of debt. 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. To that end, you should be aware of the 3 warning signs we've spotted with CALIDA Holding .

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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