We believe Holcim (VTX: HOLN) can stay on top of its debt

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Holcim SA (VTX: HOLN) has debt on its balance sheet. But does this debt concern shareholders?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest review for Holcim

How much debt does Holcim have?

As you can see below, Holcim had CHF 14.6 billion in debt, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, it has CHF 3.47 billion in cash to compensate for this, which leads to a net debt of around CHF 11.1 billion.

SWX: HOLN History of debt to equity September 26, 2021

How strong is Holcim’s balance sheet?

The most recent balance sheet shows that Holcim had liabilities of CHF 9.61 billion maturing within one year and liabilities of CHF 18.7 billion beyond. On the other hand, he had cash of 3.47 billion Swiss francs and 3.84 billion Swiss francs in receivables within one year. It therefore has liabilities totaling CHF 21.0 billion more than its combined cash and short-term receivables.

This is a mountain of leverage even compared to its gargantuan market capitalization of CHF 27.8 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

We would say Holcim’s moderate net debt to EBITDA ratio (being 2.0) indicates leverage conservatism. And its high coverage interest of 11.0 times, makes us even more comfortable. It should be noted that Holcim’s EBIT has skyrocketed after the rain, gaining 32% in the past twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Holcim’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Holcim has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.

Our point of view

Fortunately, Holcim’s impressive conversion of EBIT to free cash flow means that it has the upper hand over its debt. But, on a darker note, we’re a little concerned with its total liability level. When we consider the range of factors above, it seems Holcim is being pretty reasonable with its use of debt. This means that they are taking a bit more risk, in the hope of increasing returns for shareholders. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Holcim which you should know before investing here.

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 net growth 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 shares 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 the mentioned stocks.
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