David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, ALSO Holding SA (VTX:ALSN) is in debt. But should shareholders worry about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for ALSO Holding
What is ALSO Holding’s net debt?
You can click on the chart below for historical numbers, but it shows ALSO Holding had €344.5 million in debt in December 2021, up from €380.2 million a year prior. But on the other hand, he also has 617.2 million euros in cash, which leads to a net cash of 272.7 million euros.
How strong is ALSO Holding’s balance sheet?
According to the last published balance sheet, ALSO Holding had liabilities of 1.85 billion euros at less than 12 months and liabilities of 280.8 million euros at more than 12 months. In return, it had 617.2 million euros in cash and 1.14 billion euros in receivables due within 12 months. Its liabilities therefore total €376.6 million more than the combination of its cash and short-term receivables.
Given that ALSO Holding has a market capitalization of 2.28 billion euros, it is hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. Despite its large liabilities, ALSO Holding has a net cash position, so it is fair to say that it is not very indebted!
On another positive note, ALSO Holding increased its EBIT by 16% compared to last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ALSO Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. ALSO Holding may have net cash on the balance sheet, but it is always interesting to consider how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability. to manage debt. Over the past three years, ALSO Holding has actually produced more free cash flow than EBIT. There’s nothing better than cash coming in to stay in your lenders’ good books.
Summary
Although ALSO Holding has more liabilities than liquid assets, it also has a net cash position of 272.7 million euros. The icing on the cake was to convert 142% of this EBIT into free cash flow, bringing in 280 million euros. Is ALSO Holding’s debt therefore a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for ALSO Holding you should be aware.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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