These 4 Measures Indicate That ALSO Holding (VTX:ALSN) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ALSO Holding

What Is ALSO Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ALSO Holding had €344.5m of debt in December 2021, down from €380.2m, one year before. But on the other hand it also has €617.2m in cash, leading to a €272.7m net cash position.

How Strong Is ALSO Holding's Balance Sheet?

According to the last reported balance sheet, ALSO Holding had liabilities of €1.85b due within 12 months, and liabilities of €280.8m due beyond 12 months. Offsetting this, it had €617.2m in cash and €1.14b in receivables that were due within 12 months. So its liabilities total €376.6m more than the combination of its cash and short-term receivables.

Given ALSO Holding has a market capitalization of €2.28b, it's hard to believe these liabilities pose much threat. 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, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Over the last three years, ALSO Holding actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While ALSO Holding does have more liabilities than liquid assets, it also has net cash of €272.7m. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in €280m. So is ALSO Holding's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. 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. 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.