These 4 Measures Indicate That Schindler Holding (VTX:SCHN) Is Using Debt Reasonably Well

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.' 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. We can see that Schindler Holding AG (VTX:SCHN) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Schindler Holding

How Much Debt Does Schindler Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Schindler Holding had CHF716.0m of debt, an increase on CHF544.0m, over one year. But on the other hand it also has CHF3.34b in cash, leading to a CHF2.62b net cash position.

A Look At Schindler Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Schindler Holding had liabilities of CHF6.54b due within 12 months and liabilities of CHF1.21b due beyond that. On the other hand, it had cash of CHF3.34b and CHF3.21b worth of receivables due within a year. So its liabilities total CHF1.21b more than the combination of its cash and short-term receivables.

Since publicly traded Schindler Holding shares are worth a very impressive total of CHF18.6b, 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.

In fact Schindler Holding's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Schindler Holding has CHF2.62b in net cash. And it impressed us with free cash flow of CHF763m, being 111% of its EBIT. So we are not troubled with Schindler Holding's debt use. 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.