Schweiter Technologies (VTX:SWTQ) Has A Pretty 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.' 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 Schweiter Technologies AG (VTX:SWTQ) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Schweiter Technologies's Debt?

The image below, which you can click on for greater detail, shows that Schweiter Technologies had debt of CHF55.3m at the end of December 2024, a reduction from CHF70.0m over a year. However, its balance sheet shows it holds CHF106.8m in cash, so it actually has CHF51.5m net cash.

How Strong Is Schweiter Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Schweiter Technologies had liabilities of CHF215.3m due within 12 months and liabilities of CHF134.5m due beyond that. Offsetting these obligations, it had cash of CHF106.8m as well as receivables valued at CHF165.1m due within 12 months. So its liabilities total CHF77.9m more than the combination of its cash and short-term receivables.

Given Schweiter Technologies has a market capitalization of CHF538.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Schweiter Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Schweiter Technologies

It is just as well that Schweiter Technologies's load is not too heavy, because its EBIT was down 55% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Schweiter Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 last three years, Schweiter Technologies recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While Schweiter Technologies does have more liabilities than liquid assets, it also has net cash of CHF51.5m. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in CHF65m. So we don't have any problem with Schweiter Technologies'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. For example - Schweiter Technologies has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.