Is Schindler Holding (VTX:SCHN) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Schindler Holding AG (VTX:SCHN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Schindler Holding

How Much Debt Does Schindler Holding Carry?

As you can see below, Schindler Holding had CHF624.0m of debt at December 2022, down from CHF664.0m a year prior. However, its balance sheet shows it holds CHF3.44b in cash, so it actually has CHF2.82b net cash.

How Healthy Is Schindler Holding's Balance Sheet?

According to the last reported balance sheet, Schindler Holding had liabilities of CHF6.25b due within 12 months, and liabilities of CHF1.11b due beyond 12 months. Offsetting these obligations, it had cash of CHF3.44b as well as receivables valued at CHF3.15b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF777.0m.

Of course, Schindler Holding has a titanic market capitalization of CHF22.4b, so these liabilities are probably manageable. 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.

In fact Schindler Holding's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Schindler Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Schindler Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Schindler Holding actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 CHF2.82b. And it impressed us with free cash flow of CHF562m, being 103% of its EBIT. So we don't have any problem with Schindler Holding's use of debt. 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, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.