Schindler Holding (VTX:SCHN) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Schindler Holding AG (VTX:SCHN) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 Schindler Holding had debt of CHF544.0m at the end of June 2021, a reduction from CHF603.0m over a year. But it also has CHF3.51b in cash to offset that, meaning it has CHF2.97b net cash.

How Healthy Is Schindler Holding's Balance Sheet?

The latest balance sheet data shows that Schindler Holding had liabilities of CHF5.89b due within a year, and liabilities of CHF1.45b falling due after that. Offsetting these obligations, it had cash of CHF3.51b as well as receivables valued at CHF3.15b due within 12 months. So it has liabilities totalling CHF680.0m more than its cash and near-term receivables, combined.

Given Schindler Holding has a humongous market capitalization of CHF30.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Schindler Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Schindler Holding grew its EBIT by 15% last year, making its debt load easier to handle. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 97% 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 CHF2.97b in net cash. And it impressed us with free cash flow of CHF1.5b, being 97% 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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