Straumann Holding (VTX:STMN) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Straumann Holding AG (VTX:STMN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Straumann Holding

What Is Straumann Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that Straumann Holding had CHF461.5m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds CHF737.6m in cash, so it actually has CHF276.1m net cash.

A Look At Straumann Holding's Liabilities

According to the last reported balance sheet, Straumann Holding had liabilities of CHF543.6m due within 12 months, and liabilities of CHF892.9m due beyond 12 months. Offsetting this, it had CHF737.6m in cash and CHF510.7m in receivables that were due within 12 months. So it has liabilities totalling CHF188.1m 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 CHF14.6b 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.

And we also note warmly that Straumann Holding grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 CHF276.1m. And it impressed us with free cash flow of CHF308m, being 72% of its EBIT. So is Straumann Holding's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Straumann Holding you should be aware of.

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.