Does Lonza Group (VTX:LONN) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Lonza Group AG (VTX:LONN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Lonza Group

What Is Lonza Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Lonza Group had CHF2.42b of debt in December 2021, down from CHF3.61b, one year before. However, its balance sheet shows it holds CHF3.18b in cash, so it actually has CHF768.0m net cash.

How Healthy Is Lonza Group's Balance Sheet?

We can see from the most recent balance sheet that Lonza Group had liabilities of CHF2.37b falling due within a year, and liabilities of CHF4.27b due beyond that. On the other hand, it had cash of CHF3.18b and CHF1.16b worth of receivables due within a year. So it has liabilities totalling CHF2.29b more than its cash and near-term receivables, combined.

Of course, Lonza Group has a titanic market capitalization of CHF42.6b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Lonza Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Lonza Group has seen its EBIT plunge 10% 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 Lonza Group 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. Lonza Group 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. In the last three years, Lonza Group created free cash flow amounting to 6.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Lonza Group has CHF768.0m in net cash. So we don't have any problem with Lonza Group's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Lonza Group, 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.