SoftwareONE Holding (VTX:SWON) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SoftwareONE Holding AG (VTX:SWON) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that SoftwareONE Holding had CHF4.34m in debt in June 2022; about the same as the year before. However, it does have CHF252.8m in cash offsetting this, leading to net cash of CHF248.4m.

A Look At SoftwareONE Holding's Liabilities

We can see from the most recent balance sheet that SoftwareONE Holding had liabilities of CHF2.72b falling due within a year, and liabilities of CHF227.5m due beyond that. Offsetting this, it had CHF252.8m in cash and CHF2.44b in receivables that were due within 12 months. So it has liabilities totalling CHF256.3m more than its cash and near-term receivables, combined.

Of course, SoftwareONE Holding has a market capitalization of CHF1.66b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SoftwareONE Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that SoftwareONE Holding saw its EBIT decline by 6.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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. 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 most recent three years, SoftwareONE Holding recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While SoftwareONE Holding does have more liabilities than liquid assets, it also has net cash of CHF248.4m. And it impressed us with free cash flow of -CHF143m, being 71% of its EBIT. So we don't have any problem with SoftwareONE Holding's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with SoftwareONE Holding (including 2 which don't sit too well with us) .

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.