Sonova Holding (VTX:SOON) Seems To Use Debt Quite Sensibly

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. We can see that Sonova Holding AG (VTX:SOON) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sonova Holding

How Much Debt Does Sonova Holding Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Sonova Holding had debt of CHF1.56b, up from CHF789.3m in one year. However, its balance sheet shows it holds CHF1.77b in cash, so it actually has CHF209.9m net cash.

A Look At Sonova Holding's Liabilities

The latest balance sheet data shows that Sonova Holding had liabilities of CHF1.25b due within a year, and liabilities of CHF1.90b falling due after that. Offsetting this, it had CHF1.77b in cash and CHF507.3m in receivables that were due within 12 months. So it has liabilities totalling CHF873.4m more than its cash and near-term receivables, combined.

Since publicly traded Sonova Holding shares are worth a very impressive total of CHF22.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sonova Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Sonova Holding saw its EBIT decline by 9.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sonova 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 Sonova 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 last three years, Sonova Holding actually produced more free cash flow than EBIT. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Sonova Holding has CHF209.9m in net cash. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in CHF675m. So we don't think Sonova Holding's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sonova Holding is showing 3 warning signs in our investment analysis , you should know about...

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.
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