Schlatter Industries (VTX:STRN) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Schlatter Industries AG (VTX:STRN) makes use of debt. But is this debt a concern to shareholders?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Schlatter Industries

What Is Schlatter Industries's Debt?

The chart below, which you can click on for greater detail, shows that Schlatter Industries had CHF8.38m in debt in December 2020; about the same as the year before. On the flip side, it has CHF3.24m in cash leading to net debt of about CHF5.14m.

How Healthy Is Schlatter Industries' Balance Sheet?

According to the last reported balance sheet, Schlatter Industries had liabilities of CHF21.0m due within 12 months, and liabilities of CHF11.6m due beyond 12 months. On the other hand, it had cash of CHF3.24m and CHF17.7m worth of receivables due within a year. So it has liabilities totalling CHF11.6m more than its cash and near-term receivables, combined.

Schlatter Industries has a market capitalization of CHF29.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Schlatter Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Schlatter Industries made a loss at the EBIT level, and saw its revenue drop to CHF79m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Schlatter Industries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CHF4.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CHF292k of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Schlatter Industries , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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