Does Schindler Holding (VTX:SCHN) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Schindler Holding AG (VTX:SCHN) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Schindler Holding

How Much Debt Does Schindler Holding Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Schindler Holding had debt of CHF274.0m, up from CHF232.0m in one year. But it also has CHF3.58b in cash to offset that, meaning it has CHF3.30b net cash.

How Strong Is Schindler Holding's Balance Sheet?

We can see from the most recent balance sheet that Schindler Holding had liabilities of CHF5.93b falling due within a year, and liabilities of CHF1.05b due beyond that. On the other hand, it had cash of CHF3.58b and CHF3.18b worth of receivables due within a year. So its liabilities total CHF224.0m more than the combination of its cash and short-term receivables.

Having regard to Schindler Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF24.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Schindler Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Schindler Holding grew its EBIT by 8.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Schindler Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Schindler Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Schindler Holding generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Schindler Holding has CHF3.30b in net cash. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in CHF1.3b. So is Schindler Holding's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Schindler Holding, you may well want to click here to check an interactive graph of its earnings per share history.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.