BELIMO Holding (VTX: BEAN) is it a risky investment?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think about the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that BELIMO Holding AG (VTX: BEAN) uses debt in his business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
See our latest analysis for BELIMO Holding
What is the amount of BELIMO Holding’s debt?
You can click on the graph below for historical figures, but it shows that in December 2020 BELIMO Holding had CHF 1.66 million in debt, an increase of CHF 272.0k over one year. However, his balance sheet shows that he has 164.9 million francs in cash, so he actually has 163.3 million francs in net cash.
A look at the liabilities of BELIMO Holding
According to the latest published balance sheet, BELIMO Holding had liabilities of CHF 78.4 million due within 12 months and liabilities of CHF 15.8 million beyond 12 months. In return for these obligations, it had cash of CHF 164.9 million as well as receivables valued at CHF 86.5 million with a 12-month maturity. He can therefore boast of having 157.3 million francs more in cash than total Liabilities.
This short-term liquidity is a sign that BELIMO Holding could probably repay its debt with ease, its balance sheet being far from tight. In short, BELIMO Holding has a net cash position, so it is fair to say that it does not have a heavy debt!
In contrast, BELIMO Holding’s EBIT plunged 13% compared to last year. We believe that such a performance, if repeated frequently, could well cause difficulties for the title. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the company will decide whether BELIMO Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits do not reduce it. Although BELIMO Holding has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building ( or erodes) that cash. balanced. Over the past three years, BELIMO Holding has generated free cash flow of 81% of its very robust EBIT, more than expected. This puts him in a very strong position to pay off his debt.
Although we sympathize with investors who find debts worrying, you should keep in mind that BELIMO Holding has net cash of CHF 163.3 million, as well as more liquid assets than liabilities. Best of all, in converted 81% of this EBIT into free cash flow, which brought in CHF 97 million. We therefore do not believe that the use of debt by BELIMO Holding is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 1 warning sign for BELIMO Holding that you need to be aware of.
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash-flow net-growth stocks right now.
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