Does SFS Group (VTX:SFSN) Have A Healthy Balance Sheet?

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. As with many other companies SFS Group AG (VTX:SFSN) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 SFS Group

What Is SFS Group's Debt?

The image below, which you can click on for greater detail, shows that SFS Group had debt of CHF27.9m at the end of June 2021, a reduction from CHF140.9m over a year. However, it does have CHF207.9m in cash offsetting this, leading to net cash of CHF180.0m.

How Healthy Is SFS Group's Balance Sheet?

We can see from the most recent balance sheet that SFS Group had liabilities of CHF260.1m falling due within a year, and liabilities of CHF120.8m due beyond that. On the other hand, it had cash of CHF207.9m and CHF380.9m worth of receivables due within a year. So it can boast CHF207.9m more liquid assets than total liabilities.

This surplus suggests that SFS Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SFS Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that SFS Group has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SFS Group'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. SFS Group 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. During the last three years, SFS Group produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case SFS Group has CHF180.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 48% year-on-year EBIT growth. So we don't think SFS Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SFS Group you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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