Is SoftwareONE Holding (VTX:SWON) Using Too Much Debt?

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. As with many other companies SoftwareONE Holding AG (VTX:SWON) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SoftwareONE Holding

What Is SoftwareONE Holding's Net Debt?

As you can see below, SoftwareONE Holding had CHF4.31m of debt at June 2021, down from CHF151.9m a year prior. But it also has CHF426.4m in cash to offset that, meaning it has CHF422.1m net cash.

A Look At SoftwareONE Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that SoftwareONE Holding had liabilities of CHF2.32b due within 12 months and liabilities of CHF154.4m due beyond that. Offsetting these obligations, it had cash of CHF426.4m as well as receivables valued at CHF2.03b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that SoftwareONE Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CHF3.06b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, SoftwareONE Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

While SoftwareONE Holding doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SoftwareONE 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SoftwareONE 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. Over the last three years, SoftwareONE Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about SoftwareONE Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF422.1m. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CHF11m. So is SoftwareONE Holding's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for SoftwareONE Holding (1 doesn't sit too well with us) 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.