Straumann Holding (VTX:STMN) Could Easily Take On More Debt

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. Importantly, Straumann Holding AG (VTX:STMN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Straumann Holding

What Is Straumann Holding's Debt?

The chart below, which you can click on for greater detail, shows that Straumann Holding had CHF479.8m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds CHF884.1m in cash, so it actually has CHF404.2m net cash.

How Healthy Is Straumann Holding's Balance Sheet?

According to the last reported balance sheet, Straumann Holding had liabilities of CHF562.6m due within 12 months, and liabilities of CHF905.0m due beyond 12 months. Offsetting these obligations, it had cash of CHF884.1m as well as receivables valued at CHF390.2m due within 12 months. So its liabilities total CHF193.3m more than the combination of its cash and short-term receivables.

Having regard to Straumann Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CHF16.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Straumann Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Straumann Holding has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Straumann 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 Straumann 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. During the last three years, Straumann Holding produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. 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 CHF404.2m. And it impressed us with its EBIT growth of 74% over the last year. So is Straumann Holding's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Straumann Holding is showing 1 warning sign 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.