Does Stadler Rail (VTX:SRAIL) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Stadler Rail AG (VTX:SRAIL) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Stadler Rail

How Much Debt Does Stadler Rail Carry?

As you can see below, at the end of June 2019, Stadler Rail had CHF297.6m of debt, up from CHF98.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CHF498.9m in cash, so it actually has CHF201.3m net cash.

How Strong Is Stadler Rail's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Stadler Rail had liabilities of CHF2.03b due within 12 months and liabilities of CHF242.1m due beyond that. On the other hand, it had cash of CHF498.9m and CHF636.4m worth of receivables due within a year. So it has liabilities totalling CHF1.14b more than its cash and near-term receivables, combined.

Stadler Rail has a market capitalization of CHF4.62b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Stadler Rail boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Stadler Rail saw its EBIT decline by 2.5% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Stadler Rail'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Stadler Rail 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 two years, Stadler Rail saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Stadler Rail does have more liabilities than liquid assets, it also has net cash of CHF201.3m. So while Stadler Rail does not have a great balance sheet, it's certainly not too bad. Over time, share prices tend to follow earnings per share, so if you're interested in Stadler Rail, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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