Does EMS-CHEMIE HOLDING (VTX:EMSN) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 EMS-CHEMIE HOLDING AG (VTX:EMSN) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Our analysis indicates that EMSN is potentially undervalued!

What Is EMS-CHEMIE HOLDING's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 EMS-CHEMIE HOLDING had CHF13.0m of debt, an increase on CHF8.00m, over one year. But it also has CHF139.0m in cash to offset that, meaning it has CHF126.0m net cash.

A Look At EMS-CHEMIE HOLDING's Liabilities

Zooming in on the latest balance sheet data, we can see that EMS-CHEMIE HOLDING had liabilities of CHF405.0m due within 12 months and liabilities of CHF114.0m due beyond that. Offsetting this, it had CHF139.0m in cash and CHF414.0m in receivables that were due within 12 months. So it actually has CHF34.0m more liquid assets than total liabilities.

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 it's very unlikely that the CHF14.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, EMS-CHEMIE HOLDING boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that EMS-CHEMIE HOLDING has increased its EBIT by 5.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. EMS-CHEMIE 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. During the last three years, EMS-CHEMIE HOLDING produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that EMS-CHEMIE HOLDING has net cash of CHF126.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CHF322m, being 69% of its EBIT. So we don't think EMS-CHEMIE HOLDING's use of debt is risky. 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 example, we've discovered 1 warning sign for EMS-CHEMIE HOLDING that you should be aware of before investing here.

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.