We Think Comet Holding (VTX:COTN) 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 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. We can see that Comet Holding AG (VTX:COTN) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Comet Holding

What Is Comet Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Comet Holding had debt of CHF59.5m at the end of June 2021, a reduction from CHF67.9m over a year. But it also has CHF76.4m in cash to offset that, meaning it has CHF16.8m net cash.

A Look At Comet Holding's Liabilities

The latest balance sheet data shows that Comet Holding had liabilities of CHF120.0m due within a year, and liabilities of CHF93.2m falling due after that. Offsetting this, it had CHF76.4m in cash and CHF77.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF59.7m.

Of course, Comet Holding has a market capitalization of CHF2.85b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Better yet, Comet Holding grew its EBIT by 102% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Comet Holding has CHF16.8m in net cash. And it impressed us with free cash flow of CHF55m, being 82% of its EBIT. So we don't think Comet Holding's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Comet Holding, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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