Is Straumann Holding (VTX:STMN) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Straumann Holding AG (VTX:STMN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Straumann Holding

How Much Debt Does Straumann Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Straumann Holding had CHF291.8m of debt in December 2023, down from CHF559.9m, one year before. However, it does have CHF413.5m in cash offsetting this, leading to net cash of CHF121.7m.

How Strong Is Straumann Holding's Balance Sheet?

According to the last reported balance sheet, Straumann Holding had liabilities of CHF714.2m due within 12 months, and liabilities of CHF769.2m due beyond 12 months. On the other hand, it had cash of CHF413.5m and CHF544.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF525.2m.

Since publicly traded Straumann Holding shares are worth a very impressive total of CHF18.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Straumann Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Straumann Holding grew its EBIT by 7.8% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Straumann Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Straumann 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. Over the most recent three years, Straumann Holding recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Straumann Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF121.7m. So we don't think Straumann Holding's use of debt is risky. 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. Be aware that Straumann Holding is showing 3 warning signs in our investment analysis , you should know about...

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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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.