Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies SoftwareONE Holding AG (VTX: SWON) uses debt. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for SoftwareONE Holding
What is SoftwareONE Holding’s net debt?
As you can see below, SoftwareONE Holding had a debt of CHF 4.31 million in June 2021, up from CHF 151.9 million a year earlier. But it also has 426.4 million Swiss francs in cash to compensate for this, which means it has 422.1 million Swiss francs in net cash.
A look at the responsibilities of SoftwareONE Holding
Zooming in on the latest balance sheet data, we can see that SoftwareONE Holding had a liability of CHF 2.32 billion due within 12 months and a liability of CHF 154.4 million due beyond. In compensation for these obligations, he had cash of CHF 426.4 million as well as receivables valued at CHF 2.03 billion within 12 months. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.
This fact indicates that SoftwareONE Holding’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So while it’s hard to imagine the CHF 3.06 billion company struggling to find cash, we still think it’s worth watching its balance sheet. While it has some liabilities to note, SoftwareONE Holding also has more cash than debt, so we’re pretty confident that it can handle its debt safely.
While SoftwareONE Holding doesn’t appear to have gained much on the EBIT line, at least earnings remain stable for now. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine SoftwareONE Holding’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. SoftwareONE Holding may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, SoftwareONE Holding has actually generated more free cash flow than EBIT. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.
We could understand if investors are concerned about SoftwareONE Holding’s liabilities, but we can be reassured that it has net cash of CHF 422.1 million. The icing on the cake is that he converted 119% of that EBIT into free cash flow, bringing in CHF 11 million. So is SoftwareONE Holding’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for SoftwareONE Holding (1 is not doing too well with us) you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow-growing stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.