Here's Why Dottikon ES Holding (VTX:DESN) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Dottikon ES Holding AG (VTX:DESN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dottikon ES Holding

How Much Debt Does Dottikon ES Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Dottikon ES Holding had CHF60.0m of debt, an increase on none, over one year. But on the other hand it also has CHF219.2m in cash, leading to a CHF159.2m net cash position.

How Healthy Is Dottikon ES Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dottikon ES Holding had liabilities of CHF153.1m due within 12 months and liabilities of CHF98.0m due beyond that. Offsetting this, it had CHF219.2m in cash and CHF75.3m in receivables that were due within 12 months. So it actually has CHF43.4m more liquid assets than total liabilities.

This state of affairs indicates that Dottikon ES Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CHF3.66b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Dottikon ES Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Dottikon ES Holding grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dottikon ES Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dottikon ES Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Dottikon ES Holding saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dottikon ES Holding has net cash of CHF159.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. So we don't have any problem with Dottikon ES Holding's use of debt. 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. For instance, we've identified 2 warning signs for Dottikon ES Holding (1 shouldn't be ignored) you should be aware of.

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.