Is SFS Group (VTX:SFSN) A Risky Investment?

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. We note that SFS Group AG (VTX:SFSN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 Net 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. But on the other hand it also has CHF207.9m in cash, leading to a CHF180.0m net cash position.

How Strong 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 actually has 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!

On top of that, SFS Group grew its EBIT by 48% 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 SFS Group'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 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. Over the most recent three years, SFS Group recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with SFS Group (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.

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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