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

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.' 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. Importantly, ALSO Holding AG (VTX:ALSN) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ALSO Holding

How Much Debt Does ALSO Holding Carry?

You can click the graphic below for the historical numbers, but it shows that ALSO Holding had €267.7m of debt in December 2022, down from €344.5m, one year before. However, it does have €478.7m in cash offsetting this, leading to net cash of €211.0m.

How Strong Is ALSO Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ALSO Holding had liabilities of €1.83b due within 12 months and liabilities of €282.0m due beyond that. Offsetting these obligations, it had cash of €478.7m as well as receivables valued at €1.24b due within 12 months. So it has liabilities totalling €398.8m more than its cash and near-term receivables, combined.

Since publicly traded ALSO Holding shares are worth a total of €2.29b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

While ALSO Holding doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ALSO Holding's ability to maintain a healthy balance sheet going forward. 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 recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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 €211.0m. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in €73m. So we don't think ALSO Holding's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of ALSO Holding's earnings per share history for free.

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.