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. We can see that EMS-CHEMIE HOLDING AG (VTX:EMSN) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is EMS-CHEMIE HOLDING's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 EMS-CHEMIE HOLDING had CHF8.00m of debt, an increase on CHF4.00m, over one year. But it also has CHF186.0m in cash to offset that, meaning it has CHF178.0m net cash.
How Healthy Is EMS-CHEMIE HOLDING's Balance Sheet?
We can see from the most recent balance sheet that EMS-CHEMIE HOLDING had liabilities of CHF403.0m falling due within a year, and liabilities of CHF161.0m due beyond that. Offsetting this, it had CHF186.0m in cash and CHF379.0m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that EMS-CHEMIE 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 CHF23.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, EMS-CHEMIE HOLDING boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that EMS-CHEMIE HOLDING grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine EMS-CHEMIE 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While EMS-CHEMIE 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. Over the most recent three years, EMS-CHEMIE HOLDING recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that EMS-CHEMIE HOLDING has net cash of CHF178.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in CHF447m. So is EMS-CHEMIE HOLDING's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of EMS-CHEMIE HOLDING's earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.