Is EMS-CHEMIE HOLDING (VTX:EMSN) Using Too Much Debt?

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.' 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. We can see that EMS-CHEMIE HOLDING AG (VTX:EMSN) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for EMS-CHEMIE HOLDING

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. However, it does have CHF186.0m in cash offsetting this, leading to net cash of CHF178.0m.

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 CHF403.0m falling due within a year, and liabilities of CHF161.0m due beyond that. Offsetting these obligations, it had cash of CHF186.0m as well as receivables valued at CHF379.0m 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 CHF21.6b 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.

And we also note warmly that EMS-CHEMIE HOLDING grew its EBIT by 14% last year, making its debt load easier to handle. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 77% 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 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. Over time, share prices tend to follow earnings per share, so if you're interested in EMS-CHEMIE HOLDING, you may well want to click here to check an interactive graph of its earnings per share history.

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.
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