These 4 Measures Indicate That Zehnder Group (VTX:ZEHN) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Zehnder Group AG (VTX:ZEHN) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 €10.4m of debt in June 2021, down from €18.5m, one year before. But on the other hand it also has €121.1m in cash, leading to a €110.7m net cash position.

A Look At Zehnder Group's Liabilities

We can see from the most recent balance sheet that Zehnder Group had liabilities of €154.5m falling due within a year, and liabilities of €34.2m due beyond that. On the other hand, it had cash of €121.1m and €148.3m worth of receivables due within a year. So it actually has €80.7m 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. Simply put, the fact that Zehnder Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Zehnder Group 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 Zehnder Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Zehnder Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Zehnder Group has €110.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in €80m. So we don't think Zehnder Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zehnder Group's earnings per share history for free.

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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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.