Here's Why EMS-CHEMIE HOLDING (VTX:EMSN) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that EMS-CHEMIE HOLDING AG (VTX:EMSN) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for EMS-CHEMIE HOLDING

What Is EMS-CHEMIE HOLDING's Net Debt?

As you can see below, EMS-CHEMIE HOLDING had CHF5.17m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CHF156.2m in cash, leading to a CHF151.0m net cash position.

How Strong Is EMS-CHEMIE HOLDING's Balance Sheet?

We can see from the most recent balance sheet that EMS-CHEMIE HOLDING had liabilities of CHF290.7m falling due within a year, and liabilities of CHF162.6m due beyond that. Offsetting these obligations, it had cash of CHF156.2m as well as receivables valued at CHF362.0m due within 12 months. So it actually has CHF64.9m more liquid assets than total liabilities.

Having regard to EMS-CHEMIE 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 CHF19.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that EMS-CHEMIE HOLDING has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that EMS-CHEMIE HOLDING has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, EMS-CHEMIE HOLDING produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that EMS-CHEMIE HOLDING has net cash of CHF151.0m, 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 CHF423m. So we are not troubled with EMS-CHEMIE HOLDING's debt use. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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