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.' 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 EMS-CHEMIE HOLDING AG (VTX:EMSN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for EMS-CHEMIE HOLDING

How Much Debt Does EMS-CHEMIE HOLDING Carry?

The image below, which you can click on for greater detail, shows that at June 2024 EMS-CHEMIE HOLDING had debt of CHF22.8m, up from none in one year. However, it does have CHF357.1m in cash offsetting this, leading to net cash of CHF334.3m.

How Healthy 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 CHF294.7m due within 12 months and liabilities of CHF93.3m due beyond that. Offsetting these obligations, it had cash of CHF357.1m as well as receivables valued at CHF348.5m due within 12 months. So it can boast CHF317.6m 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 it's very unlikely that the CHF16.0b 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!

On the other hand, EMS-CHEMIE HOLDING's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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.

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. During the last three years, EMS-CHEMIE HOLDING produced sturdy free cash flow equating to 70% 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 CHF334.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in CHF499m. So we don't have any problem with EMS-CHEMIE HOLDING's use of debt. 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.

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.