These 4 Measures Indicate That SW Umwelttechnik Stoiser & Wolschner (VIE:SWUT) Is Using Debt Extensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SW Umwelttechnik Stoiser & Wolschner AG (VIE:SWUT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SW Umwelttechnik Stoiser & Wolschner

What Is SW Umwelttechnik Stoiser & Wolschner's Debt?

You can click the graphic below for the historical numbers, but it shows that SW Umwelttechnik Stoiser & Wolschner had €46.8m of debt in June 2020, down from €50.0m, one year before. On the flip side, it has €5.58m in cash leading to net debt of about €41.2m.

A Look At SW Umwelttechnik Stoiser & Wolschner's Liabilities

We can see from the most recent balance sheet that SW Umwelttechnik Stoiser & Wolschner had liabilities of €27.9m falling due within a year, and liabilities of €47.4m due beyond that. Offsetting these obligations, it had cash of €5.58m as well as receivables valued at €15.2m due within 12 months. So its liabilities total €54.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €30.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, SW Umwelttechnik Stoiser & Wolschner would probably need a major re-capitalization if its creditors were to demand repayment.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

SW Umwelttechnik Stoiser & Wolschner's net debt to EBITDA ratio of about 2.3 suggests only moderate use of debt. And its commanding EBIT of 13.0 times its interest expense, implies the debt load is as light as a peacock feather. Importantly, SW Umwelttechnik Stoiser & Wolschner grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SW Umwelttechnik Stoiser & Wolschner will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, SW Umwelttechnik Stoiser & Wolschner created free cash flow amounting to 14% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Mulling over SW Umwelttechnik Stoiser & Wolschner's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that SW Umwelttechnik Stoiser & Wolschner's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for SW Umwelttechnik Stoiser & Wolschner you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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