Straumann Holding (VTX:STMN) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies Straumann Holding AG (VTX:STMN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 2023 Straumann Holding had debt of CHF497.3m, up from CHF461.5m in one year. However, its balance sheet shows it holds CHF606.2m in cash, so it actually has CHF108.8m net cash.

A Look At Straumann Holding's Liabilities

We can see from the most recent balance sheet that Straumann Holding had liabilities of CHF956.0m falling due within a year, and liabilities of CHF573.0m due beyond that. Offsetting these obligations, it had cash of CHF606.2m as well as receivables valued at CHF622.5m due within 12 months. So it has liabilities totalling CHF300.4m more than its cash and near-term receivables, combined.

Having regard to Straumann Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF18.7b company is short on cash, but still worth keeping an eye on the 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.

On the other hand, Straumann Holding saw its EBIT drop by 8.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Straumann Holding has CHF108.8m in net cash. 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.

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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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.