SFS Group (VTX:SFSN) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that SFS Group AG (VTX:SFSN) does use debt in its business. But the real question is whether this debt is making the company risky.

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

You can click the graphic below for the historical numbers, but it shows that SFS Group had CHF43.5m of debt in December 2020, down from CHF62.0m, one year before. However, it does have CHF187.7m in cash offsetting this, leading to net cash of CHF144.2m.

How Healthy Is SFS Group's Balance Sheet?

We can see from the most recent balance sheet that SFS Group had liabilities of CHF280.3m falling due within a year, and liabilities of CHF125.6m due beyond that. On the other hand, it had cash of CHF187.7m and CHF366.6m worth of receivables due within a year. So it can boast CHF148.4m 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 the other hand, SFS Group saw its EBIT drop by 4.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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. While SFS Group 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, SFS Group produced sturdy free cash flow equating to 67% 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 we empathize with investors who find debt concerning, you should keep in mind that SFS Group has net cash of CHF144.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CHF192m, being 67% of its EBIT. So we don't think SFS Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in SFS Group, 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.

When trading SFS Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.