These 4 Measures Indicate That Dottikon ES Holding (VTX:DESN) Is Using Debt Extensively

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.' 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 Dottikon ES Holding AG (VTX:DESN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Dottikon ES Holding

What Is Dottikon ES Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Dottikon ES Holding had CHF130.0m of debt, an increase on CHF60.0m, over one year. But it also has CHF178.0m in cash to offset that, meaning it has CHF48.0m net cash.

How Healthy Is Dottikon ES Holding's Balance Sheet?

We can see from the most recent balance sheet that Dottikon ES Holding had liabilities of CHF195.4m falling due within a year, and liabilities of CHF170.6m due beyond that. Offsetting these obligations, it had cash of CHF178.0m as well as receivables valued at CHF85.1m due within 12 months. So it has liabilities totalling CHF102.8m more than its cash and near-term receivables, combined.

Given Dottikon ES Holding has a market capitalization of CHF3.04b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Dottikon ES Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Dottikon ES Holding has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dottikon ES Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dottikon ES 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. Over the last three years, Dottikon ES Holding saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Dottikon ES Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF48.0m. So while Dottikon ES Holding does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Dottikon ES Holding that you should be aware of.

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.