These 4 Measures Indicate That EMS-CHEMIE HOLDING (VTX:EMSN) Is Using Debt Reasonably Well

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 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. Importantly, EMS-CHEMIE HOLDING AG (VTX:EMSN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for EMS-CHEMIE HOLDING

What Is EMS-CHEMIE HOLDING's Net Debt?

The image below, which you can click on for greater detail, shows that EMS-CHEMIE HOLDING had debt of CHF4.00m at the end of June 2020, a reduction from CHF11.0m over a year. However, its balance sheet shows it holds CHF250.0m in cash, so it actually has CHF246.0m net cash.

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

The latest balance sheet data shows that EMS-CHEMIE HOLDING had liabilities of CHF291.0m due within a year, and liabilities of CHF171.0m falling due after that. Offsetting these obligations, it had cash of CHF250.0m as well as receivables valued at CHF246.0m due within 12 months. So it can boast 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 while it's hard to imagine that the CHF19.3b 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.

On the other hand, EMS-CHEMIE HOLDING's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 79% 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 it is always sensible to investigate a company's debt, in this case EMS-CHEMIE HOLDING has CHF246.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CHF462m, being 79% of its EBIT. So we don't have any problem with EMS-CHEMIE HOLDING's use of debt. 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. Take risks, for example - EMS-CHEMIE HOLDING has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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