Is ALSO Holding (VTX:ALSN) Using Too Much 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.' 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. Importantly, ALSO Holding AG (VTX:ALSN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, ALSO Holding had €380.2m of debt at December 2020, down from €443.5m a year prior. However, it does have €483.2m in cash offsetting this, leading to net cash of €102.9m.

A Look At ALSO Holding's Liabilities

We can see from the most recent balance sheet that ALSO Holding had liabilities of €1.69b falling due within a year, and liabilities of €372.4m due beyond that. Offsetting these obligations, it had cash of €483.2m as well as receivables valued at €1.25b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €325.1m.

Since publicly traded ALSO Holding shares are worth a total of €3.25b, it seems unlikely that this level of liabilities would be a major threat. 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!

Also good is that ALSO Holding grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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'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. While ALSO 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. Happily for any shareholders, ALSO Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although ALSO Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €102.9m. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in €234m. So we don't think ALSO Holding's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for ALSO Holding you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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