David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Lonza Group AG (VTX:LONN) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
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What is Lonza Group’s debt?
The image below, which you can click on for more details, shows that Lonza Group had a debt of 2.40 billion francs at the end of June 2022, a reduction from 3.65 billion francs year on year. However, it has 2.44 billion Swiss francs of cash that offsets this, resulting in a net cash position of 32.0 million Swiss francs.
A look at the liabilities of the Lonza group
The latest balance sheet data shows that the Lonza Group had liabilities of 2.63 billion francs due within the year, and liabilities of 4.03 billion francs due thereafter. As compensation for these obligations, it had cash of CHF 2.44 billion as well as receivables worth CHF 1.16 billion due within 12 months. Thus, its liabilities total 3.06 billion francs more than the combination of its cash and short-term receivables.
Of course, Lonza Group has a titanic market capitalization of CHF 36.0 billion, so these liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. Despite its notable liabilities, Lonza Group has net cash, so it’s fair to say that it doesn’t have a lot of debt!
But the bad news is that Lonza Group has seen its EBIT plunge by 12% in the last twelve months. We believe that this type of performance, if repeated frequently, could well spell trouble for the stock. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Lonza Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Lonza Group has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it is building ( or erodes) that treasury. balance. Over the past three years, Lonza Group has actually had a cash outflow, overall. Debt is much riskier for companies with unreliable free cash flow, so shareholders must hope that past spending will produce free cash flow in the future.
We can understand that investors are worried about Lonza Group’s liabilities, but we can take comfort in the fact that it has a net cash position of CHF 32.0 million. We therefore have no problem with the use of debt by Lonza Group. 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. To this end, you should be aware of the 1 warning sign we spotted with Lonza Group.
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% freeat present.
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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.
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