Does Chr. Hansen Holding (CPH:CHR) Have a healthy balance sheet?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a 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 chr. Hansen Holding A/S (CPH:CHR) has debt on its balance sheet. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest review for Chr. Hansen Holding

How much debt Chr. Hansen holding Carry?

You can click on the chart below for historical numbers, but it shows that Chr. Hansen Holding had 1.02 billion euros in debt in November 2021, compared to 1.76 billion euros a year earlier. However, he also had €55.8 million in cash, so his net debt is €968.1 million.

CPSE:CHR Debt to Equity Historical February 19, 2022

What is the strength of Chr. Balance sheet of Hansen Holding?

The latest balance sheet data shows that Chr. Hansen Holding had liabilities of €431.9 million maturing within the year and liabilities of €1.11 billion maturing thereafter. On the other hand, it had €55.8 million in cash and €206.1 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €1.28 billion.

Of course, Chr. Hansen Holding has a market capitalization of 8.15 billion euros, so these liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

chr. Hansen Holding’s net debt is at a very reasonable 2.5 times its EBITDA, while its EBIT covered its interest expense at just 6.4 times last year. While that doesn’t worry us too much, it does suggest that interest payments are a bit of a burden. Unfortunately, Chr. Hansen Holding has seen its EBIT fall by 7.1% over the last twelve months. If this earnings trend continues, its leverage will become heavy like the heart of a polar bear looking at its only cub. There is no doubt that we learn the most about debt from the balance sheet. But future earnings, more than anything, will determine Chr. Hansen Holding’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Chr. Hansen Holding recorded free cash flow of 71% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

On our analysis Chr. Hansen Holding’s conversion of EBIT to free cash flow should signal that it won’t have too many problems with its debt. But the other factors we noted above weren’t so encouraging. For example, it looks like it has to struggle a bit to increase its EBIT. When we consider all the elements mentioned above, it seems to us that Chr. Hansen Holding manages its debt fairly well. But be warned: we believe debt levels are high enough to warrant continued monitoring. 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. For example, we have identified 2 warning signs for Chr. Hansen Holding of which you should be aware.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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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