SoftwareONE Holding (VTX:SWON) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that SoftwareONE Holding AG (VTX:SWON) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SoftwareONE Holding

What Is SoftwareONE Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 SoftwareONE Holding had CHF9.61m of debt, an increase on CHF4.15m, over one year. But on the other hand it also has CHF578.3m in cash, leading to a CHF568.7m net cash position.

How Strong Is SoftwareONE Holding's Balance Sheet?

The latest balance sheet data shows that SoftwareONE Holding had liabilities of CHF2.14b due within a year, and liabilities of CHF213.1m falling due after that. On the other hand, it had cash of CHF578.3m and CHF1.85b worth of receivables due within a year. So it actually has CHF73.3m more liquid assets than total liabilities.

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 CHF3.79b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that SoftwareONE Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that SoftwareONE Holding has increased its EBIT by 6.0% over twelve months, which should ease any concerns about debt repayment. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, SoftwareONE Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case SoftwareONE Holding has CHF568.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in CHF253m. So we don't think SoftwareONE Holding's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with SoftwareONE Holding , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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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