Is ALSO Holding (VTX:ALSN) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that ALSO Holding AG (VTX:ALSN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ALSO Holding

What Is ALSO Holding's Net Debt?

As you can see below, ALSO Holding had €242.1m of debt at December 2023, down from €267.7m a year prior. However, its balance sheet shows it holds €666.2m in cash, so it actually has €424.1m net cash.

How Strong Is ALSO Holding's Balance Sheet?

According to the last reported balance sheet, ALSO Holding had liabilities of €2.02b due within 12 months, and liabilities of €163.1m due beyond 12 months. Offsetting these obligations, it had cash of €666.2m as well as receivables valued at €1.32b due within 12 months. So its liabilities total €203.2m more than the combination of its cash and short-term receivables.

Of course, ALSO Holding has a market capitalization of €2.88b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, ALSO Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that ALSO Holding saw its EBIT decline by 4.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 ALSO 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ALSO 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. Happily for any shareholders, ALSO Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about ALSO Holding's liabilities, but we can be reassured by the fact it has has net cash of €424.1m. And it impressed us with free cash flow of €363m, being 110% of its EBIT. So is ALSO Holding's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in ALSO Holding, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.