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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that ALSO Holding AG (VTX:ALSN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 ALSO Holding

How Much Debt Does ALSO Holding Carry?

As you can see below, ALSO Holding had €205.5m of debt at June 2023, down from €333.4m a year prior. But it also has €612.1m in cash to offset that, meaning it has €406.6m net cash.

A Look At ALSO Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that ALSO Holding had liabilities of €1.82b due within 12 months and liabilities of €273.6m due beyond that. Offsetting this, it had €612.1m in cash and €589.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €894.0m.

ALSO Holding has a market capitalization of €3.27b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, ALSO Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that ALSO Holding has seen its EBIT plunge 12% 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, ALSO Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 €406.6m. And it impressed us with free cash flow of €894m, being 121% of its EBIT. So we don't have any problem with ALSO Holding's use of debt. 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.

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.