Is Schindler Holding (VTX:SCHN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Schindler Holding AG (VTX:SCHN) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Schindler Holding

What Is Schindler Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Schindler Holding had CHF232.0m of debt in June 2023, down from CHF716.0m, one year before. But it also has CHF3.04b in cash to offset that, meaning it has CHF2.80b net cash.

A Look At Schindler Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Schindler Holding had liabilities of CHF5.82b due within 12 months and liabilities of CHF1.13b due beyond that. Offsetting these obligations, it had cash of CHF3.04b as well as receivables valued at CHF3.19b due within 12 months. So it has liabilities totalling CHF727.0m more than its cash and near-term receivables, combined.

Since publicly traded Schindler Holding shares are worth a very impressive total of CHF21.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Schindler Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Schindler Holding grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Schindler Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Schindler Holding recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Schindler Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF2.80b. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in CHF800m. 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.

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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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.