CALIDA Holding (VTX:CALN) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 CALIDA Holding AG (VTX:CALN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 CALIDA Holding

How Much Debt Does CALIDA Holding Carry?

You can click the graphic below for the historical numbers, but it shows that CALIDA Holding had CHF1.53m of debt in December 2020, down from CHF23.6m, one year before. However, its balance sheet shows it holds CHF45.5m in cash, so it actually has CHF43.9m net cash.

How Strong Is CALIDA Holding's Balance Sheet?

We can see from the most recent balance sheet that CALIDA Holding had liabilities of CHF91.5m falling due within a year, and liabilities of CHF59.1m due beyond that. On the other hand, it had cash of CHF45.5m and CHF34.9m worth of receivables due within a year. So it has liabilities totalling CHF70.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since CALIDA Holding has a market capitalization of CHF300.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, CALIDA Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, CALIDA Holding's EBIT fell a jaw-dropping 80% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While CALIDA 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, CALIDA Holding actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 CHF43.9m. And it impressed us with free cash flow of CHF31m, being 192% of its EBIT. So we don't have any problem with CALIDA Holding's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for CALIDA Holding you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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