Schindler Holding (VTX:SCHN) Could Easily Take On More Debt

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.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Schindler Holding

What Is Schindler Holding's Debt?

As you can see below, Schindler Holding had CHF251.0m of debt at December 2023, down from CHF624.0m a year prior. However, it does have CHF3.57b in cash offsetting this, leading to net cash of CHF3.32b.

How Healthy Is Schindler Holding's Balance Sheet?

The latest balance sheet data shows that Schindler Holding had liabilities of CHF5.59b due within a year, and liabilities of CHF1.01b falling due after that. Offsetting this, it had CHF3.57b in cash and CHF2.88b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF143.0m.

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 CHF23.8b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

On top of that, Schindler Holding grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Schindler Holding recorded free cash flow worth a fulsome 90% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Schindler Holding has CHF3.32b in net cash. And it impressed us with free cash flow of CHF1.2b, being 90% of its EBIT. 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.