These 4 Measures Indicate That SFS Group (VTX:SFSN) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

As you can see below, SFS Group had CHF6.80m of debt at December 2021, down from CHF43.5m a year prior. But it also has CHF286.0m in cash to offset that, meaning it has CHF279.2m net cash.

A Look At SFS Group's Liabilities

Zooming in on the latest balance sheet data, we can see that SFS Group had liabilities of CHF298.7m due within 12 months and liabilities of CHF90.0m due beyond that. Offsetting these obligations, it had cash of CHF286.0m as well as receivables valued at CHF340.4m due within 12 months. So it can boast CHF237.7m 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 33% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SFS Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, SFS Group recorded free cash flow worth 74% 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 we empathize with investors who find debt concerning, you should keep in mind that SFS Group has net cash of CHF279.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 33% year-on-year EBIT growth. So is SFS Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for SFS Group that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.