Does Schweiter Technologies (VTX:SWTQ) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Schweiter Technologies AG (VTX:SWTQ) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Schweiter Technologies

What Is Schweiter Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Schweiter Technologies had CHF38.7m of debt in June 2021, down from CHF51.9m, one year before. But it also has CHF101.9m in cash to offset that, meaning it has CHF63.2m net cash.

A Look At Schweiter Technologies' Liabilities

The latest balance sheet data shows that Schweiter Technologies had liabilities of CHF202.2m due within a year, and liabilities of CHF159.2m falling due after that. On the other hand, it had cash of CHF101.9m and CHF231.0m worth of receivables due within a year. So it has liabilities totalling CHF28.5m more than its cash and near-term receivables, combined.

This state of affairs indicates that Schweiter Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CHF1.96b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Schweiter Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Schweiter Technologies has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. 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 Schweiter Technologies's ability to maintain a healthy balance sheet going forward. 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. Schweiter Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Schweiter Technologies recorded free cash flow worth 78% 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

We could understand if investors are concerned about Schweiter Technologies's liabilities, but we can be reassured by the fact it has has net cash of CHF63.2m. And it impressed us with its EBIT growth of 63% over the last year. So we don't think Schweiter Technologies's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Schweiter Technologies, you may well want to click here to check an interactive graph of its earnings per share history.

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.
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