We Think Ypsomed Holding (VTX:YPSN) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Ypsomed Holding AG (VTX:YPSN) does carry debt. But the more important question is: how much risk is that debt creating?

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, 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 Ypsomed Holding

What Is Ypsomed Holding's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ypsomed Holding had debt of CHF325.2m, up from CHF203.0m in one year. However, it also had CHF52.3m in cash, and so its net debt is CHF272.9m.

A Look At Ypsomed Holding's Liabilities

The latest balance sheet data shows that Ypsomed Holding had liabilities of CHF513.4m due within a year, and liabilities of CHF45.8m falling due after that. Offsetting this, it had CHF52.3m in cash and CHF141.5m in receivables that were due within 12 months. So its liabilities total CHF365.3m more than the combination of its cash and short-term receivables.

Since publicly traded Ypsomed Holding shares are worth a total of CHF4.89b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Ypsomed Holding's net debt to EBITDA ratio of about 1.9 suggests only moderate use of debt. And its strong interest cover of 16.4 times, makes us even more comfortable. It is well worth noting that Ypsomed Holding's EBIT shot up like bamboo after rain, gaining 52% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ypsomed 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Ypsomed Holding burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Ypsomed Holding's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. It's also worth noting that Ypsomed Holding is in the Medical Equipment industry, which is often considered to be quite defensive. All these things considered, it appears that Ypsomed Holding can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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 instance, we've identified 2 warning signs for Ypsomed Holding that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.