Straumann Holding (VTX:STMN) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Straumann Holding AG (VTX:STMN) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Straumann Holding

How Much Debt Does Straumann Holding Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Straumann Holding had debt of CHF479.9m, up from CHF442.6m in one year. However, its balance sheet shows it holds CHF725.5m in cash, so it actually has CHF245.7m net cash.

How Strong Is Straumann Holding's Balance Sheet?

According to the last reported balance sheet, Straumann Holding had liabilities of CHF462.0m due within 12 months, and liabilities of CHF986.0m due beyond 12 months. Offsetting these obligations, it had cash of CHF725.5m as well as receivables valued at CHF397.8m due within 12 months. So its liabilities total CHF324.7m 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 CHF32.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

In addition to that, we're happy to report that Straumann Holding has boosted its EBIT by 83%, thus reducing the spectre of future debt repayments. 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 Straumann Holding can strengthen its balance sheet over time. 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. 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 72% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Straumann Holding has CHF245.7m in net cash. And we liked the look of last year's 83% year-on-year EBIT growth. So we don't think Straumann Holding's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Straumann Holding's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.