We Think EMS-CHEMIE HOLDING (VTX:EMSN) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies EMS-CHEMIE HOLDING AG (VTX:EMSN) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

See 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 December 2023 EMS-CHEMIE HOLDING had CHF21.8m of debt, an increase on CHF35.0k, over one year. But on the other hand it also has CHF465.2m in cash, leading to a CHF443.5m net cash position.

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

We can see from the most recent balance sheet that EMS-CHEMIE HOLDING had liabilities of CHF293.2m falling due within a year, and liabilities of CHF105.3m due beyond that. Offsetting this, it had CHF465.2m in cash and CHF374.7m in receivables that were due within 12 months. So it can boast CHF441.4m more liquid assets than total liabilities.

This short term liquidity is a sign that EMS-CHEMIE HOLDING could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 19% in the last twelve months. 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 ultimately the future profitability of the business will decide if EMS-CHEMIE HOLDING can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 71% 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 CHF443.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CHF527m, being 71% of its EBIT. So we are not troubled with EMS-CHEMIE HOLDING's debt use. 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.

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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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.