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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 the more important question is: how much risk is that debt creating?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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?

The image below, which you can click on for greater detail, shows that ALSO Holding had debt of €344.5m at the end of December 2021, a reduction from €380.2m over a year. But it also has €617.2m in cash to offset that, meaning it has €272.7m net cash.

A Look At ALSO Holding's Liabilities

The latest balance sheet data shows that ALSO Holding had liabilities of €1.85b due within a year, and liabilities of €280.8m falling due after that. Offsetting these obligations, it had cash of €617.2m as well as receivables valued at €1.14b due within 12 months. So it has liabilities totalling €376.6m more than its cash and near-term receivables, combined.

Given ALSO Holding has a market capitalization of €2.91b, 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!

And we also note warmly that ALSO Holding grew its EBIT by 16% last year, making its debt load easier to handle. 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 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. 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

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 we don't think ALSO Holding's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with ALSO Holding .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.