Schweiter Technologies (VTX:SWTQ) Seems To Use Debt Quite Sensibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Schweiter Technologies AG (VTX:SWTQ) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out 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 2023 Schweiter Technologies had CHF70.0m of debt, an increase on CHF43.5m, over one year. But it also has CHF93.8m in cash to offset that, meaning it has CHF23.8m net cash.

How Strong Is Schweiter Technologies' Balance Sheet?

According to the last reported balance sheet, Schweiter Technologies had liabilities of CHF211.2m due within 12 months, and liabilities of CHF125.1m due beyond 12 months. Offsetting this, it had CHF93.8m in cash and CHF179.3m in receivables that were due within 12 months. So it has liabilities totalling CHF63.2m more than its cash and near-term receivables, combined.

Given Schweiter Technologies has a market capitalization of CHF581.3m, 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. 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.

Also good is that Schweiter Technologies grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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. In the last three years, Schweiter Technologies's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Schweiter Technologies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF23.8m. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Schweiter Technologies's debt use. 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 example, we've discovered 1 warning sign for Schweiter Technologies that you should be aware of before investing here.

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.