We Think SW Umwelttechnik Stoiser & Wolschner (VIE:SWUT) Is Taking Some Risk With Its Debt

Warren Buffett famously said, '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. Importantly, SW Umwelttechnik Stoiser & Wolschner AG (VIE:SWUT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SW Umwelttechnik Stoiser & Wolschner

How Much Debt Does SW Umwelttechnik Stoiser & Wolschner Carry?

As you can see below, SW Umwelttechnik Stoiser & Wolschner had €48.7m of debt at December 2020, down from €55.4m a year prior. However, it also had €2.88m in cash, and so its net debt is €45.8m.

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

According to the last reported balance sheet, SW Umwelttechnik Stoiser & Wolschner had liabilities of €21.9m due within 12 months, and liabilities of €42.9m due beyond 12 months. Offsetting these obligations, it had cash of €2.88m as well as receivables valued at €10.7m due within 12 months. So it has liabilities totalling €51.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €23.1m 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

SW Umwelttechnik Stoiser & Wolschner's net debt is 2.9 times its EBITDA, which is a significant but still reasonable amount of leverage. But its EBIT was about 10.6 times its interest expense, implying the company isn't really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. Sadly, SW Umwelttechnik Stoiser & Wolschner's EBIT actually dropped 3.1% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. But it is SW Umwelttechnik Stoiser & Wolschner's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, SW Umwelttechnik Stoiser & Wolschner reported free cash flow worth 7.4% 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

We'd go so far as to say SW Umwelttechnik Stoiser & Wolschner's level of total liabilities was disappointing. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Overall, it seems to us that SW Umwelttechnik Stoiser & Wolschner's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with SW Umwelttechnik Stoiser & Wolschner (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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