Does Zehnder Group (VTX:ZEHN) Have A Healthy Balance Sheet?

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.' 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. We can see that Zehnder Group AG (VTX:ZEHN) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Zehnder Group

What Is Zehnder Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zehnder Group had €9.90m of debt in December 2020, down from €23.4m, one year before. However, its balance sheet shows it holds €106.3m in cash, so it actually has €96.4m net cash.

How Strong Is Zehnder Group's Balance Sheet?

The latest balance sheet data shows that Zehnder Group had liabilities of €136.6m due within a year, and liabilities of €35.0m falling due after that. Offsetting this, it had €106.3m in cash and €131.5m in receivables that were due within 12 months. So it can boast €66.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Zehnder Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zehnder Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Zehnder Group grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zehnder Group'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. Zehnder Group 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, Zehnder Group generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Zehnder Group has €96.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €79m, being 82% of its EBIT. So we don't think Zehnder Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Zehnder Group has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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