Is Comet Holding (VTX:COTN) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Comet Holding AG (VTX:COTN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Comet Holding

What Is Comet Holding's Debt?

As you can see below, Comet Holding had CHF59.6m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CHF115.5m in cash, so it actually has CHF56.0m net cash.

How Strong Is Comet Holding's Balance Sheet?

According to the last reported balance sheet, Comet Holding had liabilities of CHF126.0m due within 12 months, and liabilities of CHF89.4m due beyond 12 months. Offsetting this, it had CHF115.5m in cash and CHF81.9m in receivables that were due within 12 months. So it has liabilities totalling CHF18.0m more than its cash and near-term receivables, combined.

Having regard to Comet Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF1.92b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Comet Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Comet Holding grew its EBIT by 138% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Comet 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Comet 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, Comet 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 Comet Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF56.0m. And it impressed us with free cash flow of CHF59m, being 95% of its EBIT. So we don't think Comet Holding's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Comet Holding you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.