These 4 Measures Indicate That Schlatter Industries (VTX:STRN) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Schlatter Industries AG (VTX:STRN) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Schlatter Industries

What Is Schlatter Industries's Net Debt?

As you can see below, Schlatter Industries had CHF6.19m of debt at June 2023, down from CHF7.71m a year prior. But it also has CHF8.27m in cash to offset that, meaning it has CHF2.08m net cash.

A Look At Schlatter Industries' Liabilities

We can see from the most recent balance sheet that Schlatter Industries had liabilities of CHF43.0m falling due within a year, and liabilities of CHF10.6m due beyond that. Offsetting this, it had CHF8.27m in cash and CHF33.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF12.0m.

Schlatter Industries has a market capitalization of CHF26.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Schlatter Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Schlatter Industries saw its EBIT drop by 9.8% 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 Schlatter Industries's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Schlatter Industries 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, Schlatter Industries recorded free cash flow worth 54% 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 Schlatter Industries does have more liabilities than liquid assets, it also has net cash of CHF2.08m. So we don't have any problem with Schlatter Industries's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Schlatter Industries (of which 2 are a bit concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.