These 4 Measures Indicate That Dottikon ES Holding (VTX:DESN) Is Using Debt Reasonably Well

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Dottikon ES Holding AG (VTX:DESN) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Dottikon ES Holding

How Much Debt Does Dottikon ES Holding Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Dottikon ES Holding had debt of CHF60.0m, up from none in one year. However, its balance sheet shows it holds CHF219.2m in cash, so it actually has CHF159.2m net cash.

A Look At Dottikon ES Holding's Liabilities

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 these obligations, it had cash of CHF219.2m as well as receivables valued at CHF75.3m due within 12 months. So it actually has CHF43.4m more liquid assets than total liabilities.

Having regard to Dottikon ES Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CHF3.13b 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.

In addition to that, we're happy to report that Dottikon ES Holding has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Dottikon ES 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 it is always sensible to investigate a company's debt, in this case Dottikon ES Holding has CHF159.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 33% year-on-year EBIT growth. So we are not troubled with Dottikon ES Holding's debt use. 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 Dottikon ES Holding 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.