We Think ALSO Holding (VTX:ALSN) Can Manage Its Debt With Ease

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?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ALSO Holding

What Is ALSO Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that ALSO Holding had €308.8m of debt in June 2021, down from €470.4m, one year before. However, it does have €346.4m in cash offsetting this, leading to net cash of €37.6m.

How Strong Is ALSO Holding's Balance Sheet?

We can see from the most recent balance sheet that ALSO Holding had liabilities of €1.43b falling due within a year, and liabilities of €356.0m due beyond that. Offsetting this, it had €346.4m in cash and €1.25b in receivables that were due within 12 months. So its liabilities total €188.2m more than the combination of its cash and short-term receivables.

Since publicly traded ALSO Holding shares are worth a total of €3.33b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Also good is that ALSO Holding grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, ALSO Holding generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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 €37.6m. And it impressed us with free cash flow of €95m, being 95% of its EBIT. So is ALSO Holding's debt a risk? It doesn't seem so to us. 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.

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. 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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