The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies BELIMO Holding AG (VTX:BEAN) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.
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What Is BELIMO Holding's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 BELIMO Holding had debt of CHF5.29m, up from none in one year. However, it does have CHF127.5m in cash offsetting this, leading to net cash of CHF122.2m.
A Look At BELIMO Holding's Liabilities
We can see from the most recent balance sheet that BELIMO Holding had liabilities of CHF98.6m falling due within a year, and liabilities of CHF24.4m due beyond that. On the other hand, it had cash of CHF127.5m and CHF117.9m worth of receivables due within a year. So it actually has CHF122.5m more liquid assets than total liabilities.
This short term liquidity is a sign that BELIMO Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that BELIMO Holding has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that BELIMO Holding grew its EBIT at 14% over the last year, further increasing its ability to manage debt. 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 BELIMO Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.