Is Orell Füssli Holding (VTX:OFN) Using Too Much Debt?
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. 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. Importantly, Orell Füssli Holding AG (VTX:OFN) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Orell Füssli Holding
How Much Debt Does Orell Füssli Holding Carry?
The image below, which you can click on for greater detail, shows that Orell Füssli Holding had debt of CHF1.64m at the end of June 2019, a reduction from CHF2.48m over a year. However, it does have CHF94.6m in cash offsetting this, leading to net cash of CHF92.9m.
How Healthy Is Orell Füssli Holding's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Orell Füssli Holding had liabilities of CHF70.9m due within 12 months and liabilities of CHF4.39m due beyond that. Offsetting these obligations, it had cash of CHF94.6m as well as receivables valued at CHF44.3m due within 12 months. So it actually has CHF63.6m more liquid assets than total liabilities.
This excess liquidity is a great indication that Orell Füssli Holding's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Orell Füssli Holding has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Orell Füssli Holding has boosted its EBIT by 76%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Orell Füssli Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Orell Füssli 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, Orell Füssli 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 we empathize with investors who find debt concerning, you should keep in mind that Orell Füssli Holding has net cash of CHF92.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 154% of that EBIT to free cash flow, bringing in CHF35m. The bottom line is that we do not find Orell Füssli Holding's debt levels at all concerning. While Orell Füssli Holding didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away.Click here to see if its earnings are heading in the right direction, over the medium term.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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 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. Thank you for reading.
