These 4 Measures Indicate That Straumann Holding (VTX:STMN) Is Using Debt Safely

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

Check out our latest analysis for Straumann Holding

What Is Straumann Holding's Debt?

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

A Look At Straumann Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Straumann Holding had liabilities of CHF562.6m due within 12 months and liabilities of CHF905.0m due beyond that. On the other hand, it had cash of CHF884.1m and CHF390.2m worth of receivables due within a year. 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 it's very unlikely that the CHF20.6b 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.

On top of that, Straumann Holding grew its EBIT by 74% over the last twelve months, and that growth will make it easier to handle its debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 77% 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 CHF404.2m in net cash. And we liked the look of last year's 74% year-on-year EBIT growth. So we don't think Straumann Holding's use of debt is risky. 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. For example - Straumann Holding has 1 warning sign we think 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.