Schweiter Technologies (VTX:SWTQ) Could Easily Take On More Debt

Warren Buffett famously said, '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. Importantly, Schweiter Technologies AG (VTX:SWTQ) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Schweiter Technologies

What Is Schweiter Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Schweiter Technologies had CHF5.27m of debt, an increase on CHF427.0k, over one year. However, it does have CHF163.7m in cash offsetting this, leading to net cash of CHF158.4m.

A Look At Schweiter Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Schweiter Technologies had liabilities of CHF179.9m due within 12 months and liabilities of CHF179.3m due beyond that. On the other hand, it had cash of CHF163.7m and CHF203.3m worth of receivables due within a year. So it actually has CHF7.79m more liquid assets than total liabilities.

Having regard to Schweiter Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF2.16b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Schweiter Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Schweiter Technologies grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. 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 Schweiter Technologies'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 Schweiter Technologies 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 three years, Schweiter Technologies recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Schweiter Technologies has net cash of CHF158.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CHF120m, being 81% of its EBIT. So is Schweiter Technologies's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Schweiter Technologies that you should be aware of.

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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