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, Bachem Holding AG (VTX:BANB) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
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How Much Debt Does Bachem Holding Carry?
As you can see below, Bachem Holding had CHF113.7m of debt at June 2019, down from CHF144.9m a year prior. However, it does have CHF12.0m in cash offsetting this, leading to net debt of about CHF101.7m.
How Healthy Is Bachem Holding's Balance Sheet?
We can see from the most recent balance sheet that Bachem Holding had liabilities of CHF89.7m falling due within a year, and liabilities of CHF96.6m due beyond that. On the other hand, it had cash of CHF12.0m and CHF65.7m worth of receivables due within a year. So its liabilities total CHF108.7m more than the combination of its cash and short-term receivables.
Since publicly traded Bachem Holding shares are worth a total of CHF1.96b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Bachem Holding's net debt is only 1.2 times its EBITDA. And its EBIT covers its interest expense a whopping 115 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that Bachem Holding has boosted its EBIT by 31%, 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 Bachem Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.