Here's Why Dottikon ES Holding (VTX:DESN) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Dottikon ES Holding AG (VTX:DESN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dottikon ES Holding

How Much Debt Does Dottikon ES Holding Carry?

As you can see below, at the end of March 2024, Dottikon ES Holding had CHF100.0m of debt, up from CHF60.0m a year ago. Click the image for more detail. But it also has CHF200.6m in cash to offset that, meaning it has CHF100.6m net cash.

How Strong Is Dottikon ES Holding's Balance Sheet?

We can see from the most recent balance sheet that Dottikon ES Holding had liabilities of CHF170.3m falling due within a year, and liabilities of CHF136.1m due beyond that. On the other hand, it had cash of CHF200.6m and CHF63.9m worth of receivables due within a year. So it has liabilities totalling CHF41.9m more than its cash and near-term receivables, combined.

This state of affairs indicates that Dottikon ES 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 CHF3.50b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Dottikon ES Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Dottikon ES Holding saw its EBIT drop by 3.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dottikon ES Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Dottikon ES 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, Dottikon ES Holding burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dottikon ES Holding has CHF100.6m in net cash. So we are not troubled with Dottikon ES Holding's debt use. 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 Dottikon ES 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com