Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Bachem Holding AG (VTX:BANB) has debt on its balance sheet. But the more important question is: what risk does this debt create?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Bachem Holding

What is Bachem Holding’s debt?

The image below, which you can click on for more details, shows that Bachem Holding had a debt of 20.0 million francs at the end of December 2021, a reduction of 107.3 million francs over one year. But he also has 442.4 million francs in cash to offset that, which means he has 422.4 million francs in net cash.

A look at the liabilities of Bachem Holding

Zooming in on the latest balance sheet data, we can see that Bachem Holding had liabilities of CHF 134.6 million due within 12 months and liabilities of CHF 42.9 million due beyond. In return, it had 442.4 million francs in cash and 114.8 million francs in receivables due within 12 months. It can therefore claim 379.7 million francs more liquidities than total Passives.

This surplus suggests that Bachem Holding has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Simply put, the fact that Bachem Holding has more cash than debt is arguably a good indication that it can safely manage its debt.

On top of that, we are pleased to report that Bachem Holding increased its EBIT by 33%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Bachem Holding can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cash, not book profits. Bachem Holding may have net cash on the balance sheet, but it is always interesting to see 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 capacity. . to manage debt. Over the past three years, Bachem Holding’s free cash flow amounted to 21% of its EBIT, less than expected. It’s not great when it comes to paying off debt.

Summary

While we sympathize with investors who find debt a concern, you should bear in mind that Bachem Holding has a net cash position of CHF 422.4 million, as well as more liquid assets than liabilities. And we liked the look of EBIT growth of 33% YoY last year. We therefore do not believe that Bachem Holding’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 3 warning signs for Bachem Holding (1 makes us a little uneasy!) that you should be aware of before investing here.

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% freeright now.

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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.