Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Von Roll Holding AG (VTX:ROL) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Von Roll Holding
What Is Von Roll Holding's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Von Roll Holding had CHF8.77m of debt in June 2019, down from CHF154.8m, one year before. However, it does have CHF69.4m in cash offsetting this, leading to net cash of CHF60.6m.
A Look At Von Roll Holding's Liabilities
According to the last reported balance sheet, Von Roll Holding had liabilities of CHF67.1m due within 12 months, and liabilities of CHF49.6m due beyond 12 months. On the other hand, it had cash of CHF69.4m and CHF69.3m worth of receivables due within a year. So it actually has CHF22.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Von Roll Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Von Roll Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Von Roll Holding grew its EBIT by 152% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Von Roll Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Von Roll 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, Von Roll Holding saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Von Roll Holding has net cash of CHF60.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 152% over the last year. So we are not troubled with Von Roll Holding's debt use. Even though Von Roll Holding lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check outhow earnings have been trending over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.