These 4 Measures Indicate That Comet Holding (VTX:COTN) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Comet Holding AG (VTX:COTN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Comet Holding

How Much Debt Does Comet Holding Carry?

As you can see below, Comet Holding had CHF59.7m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has CHF125.9m in cash to offset that, meaning it has CHF66.3m net cash.

How Healthy Is Comet Holding's Balance Sheet?

The latest balance sheet data shows that Comet Holding had liabilities of CHF128.0m due within a year, and liabilities of CHF97.3m falling due after that. Offsetting this, it had CHF125.9m in cash and CHF84.9m in receivables that were due within 12 months. So it has liabilities totalling CHF14.4m 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 while it's hard to imagine that the CHF1.85b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Comet Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Comet Holding grew its EBIT at 18% 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 Comet Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 CHF66.3m. And it impressed us with free cash flow of CHF42m, being 66% of its EBIT. So is Comet Holding's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Comet Holding you should be aware of.

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.