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

By
Simply Wall St
Published
August 31, 2021
WBAG:SWUT
Source: Shutterstock

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SW Umwelttechnik Stoiser & Wolschner AG (VIE:SWUT) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View 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 as of June 2021 SW Umwelttechnik Stoiser & Wolschner had €50.8m of debt, an increase on €47.4m, over one year. However, it also had €2.76m in cash, and so its net debt is €48.0m.

debt-equity-history-analysis
WBAG:SWUT Debt to Equity History September 1st 2021

How Healthy Is SW Umwelttechnik Stoiser & Wolschner's Balance Sheet?

The latest balance sheet data shows that SW Umwelttechnik Stoiser & Wolschner had liabilities of €31.6m due within a year, and liabilities of €41.9m falling due after that. On the other hand, it had cash of €2.76m and €14.0m worth of receivables due within a year. So its liabilities total €56.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €31.2m company, like a colossus towering over mere mortals. 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 is 3.0 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 11.6 is very high, suggesting that the interest expense on the debt is currently quite low. Unfortunately, SW Umwelttechnik Stoiser & Wolschner's EBIT flopped 15% over the last four quarters. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. When analysing debt levels, the balance sheet is the obvious place to start. But it is SW Umwelttechnik Stoiser & Wolschner's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, SW Umwelttechnik Stoiser & Wolschner reported free cash flow worth 6.3% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

On the face of it, SW Umwelttechnik Stoiser & Wolschner's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. After considering the datapoints discussed, we think SW Umwelttechnik Stoiser & Wolschner has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. For example SW Umwelttechnik Stoiser & Wolschner has 3 warning signs (and 1 which can't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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