We Think Schweiter Technologies (VTX:SWTQ) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Schweiter Technologies AG (VTX:SWTQ) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its 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 Schweiter Technologies had CHF38.7m of debt in June 2021, down from CHF51.9m, one year before. But on the other hand it also has CHF101.9m in cash, leading to a CHF63.2m net cash position.

How Healthy Is Schweiter Technologies' Balance Sheet?

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 it's very unlikely that the CHF1.97b company is short on cash, but still worth keeping an eye on the 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 69%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Schweiter Technologies produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 we liked the look of last year's 69% year-on-year EBIT growth. 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.