SoftwareONE Holding (VTX:SWON) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, SoftwareONE Holding AG (VTX:SWON) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for SoftwareONE Holding

What Is SoftwareONE Holding's Debt?

The image below, which you can click on for greater detail, shows that SoftwareONE Holding had debt of CHF4.31m at the end of June 2021, a reduction from CHF151.9m over a year. But on the other hand it also has CHF426.4m in cash, leading to a CHF422.1m net cash position.

A Look At SoftwareONE Holding's Liabilities

According to the last reported balance sheet, SoftwareONE Holding had liabilities of CHF2.32b due within 12 months, and liabilities of CHF154.4m due beyond 12 months. Offsetting these obligations, it had cash of CHF426.4m as well as receivables valued at CHF2.03b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to SoftwareONE Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF3.90b company is short on cash, but still worth keeping an eye on the 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.

Importantly SoftwareONE Holding's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. 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 SoftwareONE Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SoftwareONE Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, SoftwareONE 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 it is always sensible to look at a company's total liabilities, it is very reassuring that SoftwareONE Holding has CHF422.1m in net cash. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CHF11m. So we don't think SoftwareONE Holding's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for SoftwareONE Holding you should be aware of, and 1 of them is a bit unpleasant.

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.

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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