EMS-CHEMIE HOLDING (VTX:EMSN) Has A Rock Solid Balance Sheet
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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. Importantly, EMS-CHEMIE HOLDING AG (VTX:EMSN) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for EMS-CHEMIE HOLDING
What Is EMS-CHEMIE HOLDING's Net Debt?
As you can see below, at the end of June 2019, EMS-CHEMIE HOLDING had CHF11.0m of debt, up from CHF5.0 a year ago. Click the image for more detail. But it also has CHF361.0m in cash to offset that, meaning it has CHF350.0m net cash.
How Strong Is EMS-CHEMIE HOLDING's Balance Sheet?
We can see from the most recent balance sheet that EMS-CHEMIE HOLDING had liabilities of CHF404.0m falling due within a year, and liabilities of CHF180.0m due beyond that. Offsetting this, it had CHF361.0m in cash and CHF356.0m in receivables that were due within 12 months. So it actually has CHF133.0m more liquid assets than total liabilities.
This state of affairs indicates that EMS-CHEMIE 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 CHF15.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, EMS-CHEMIE HOLDING boasts net cash, so it's fair to say it does not have a heavy debt load!
While EMS-CHEMIE HOLDING doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine EMS-CHEMIE 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. EMS-CHEMIE 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, EMS-CHEMIE HOLDING recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that EMS-CHEMIE HOLDING has net cash of CHF350.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CHF456m, being 73% of its EBIT. So we don't think EMS-CHEMIE HOLDING's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - EMS-CHEMIE HOLDING has 1 warning sign we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
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