Is EMS-CHEMIE HOLDING (VTX:EMSN) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 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 Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for EMS-CHEMIE HOLDING

What Is EMS-CHEMIE HOLDING's Debt?

The image below, which you can click on for greater detail, shows that EMS-CHEMIE HOLDING had debt of CHF2.98m at the end of December 2021, a reduction from CHF5.17m over a year. But it also has CHF111.4m in cash to offset that, meaning it has CHF108.4m net cash.

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

Zooming in on the latest balance sheet data, we can see that EMS-CHEMIE HOLDING had liabilities of CHF380.2m due within 12 months and liabilities of CHF116.1m due beyond that. On the other hand, it had cash of CHF111.4m and CHF427.6m worth of receivables due within a year. So it can boast CHF42.6m 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 while it's hard to imagine that the CHF16.7b 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.

Also positive, EMS-CHEMIE HOLDING grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 76% 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.

Summing up

While it is always sensible to investigate a company's debt, in this case EMS-CHEMIE HOLDING has CHF108.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in CHF438m. So is EMS-CHEMIE HOLDING's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for EMS-CHEMIE HOLDING that you should be aware of before investing here.

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.