We Think Zehnder Group (VTX:ZEHN) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Zehnder Group AG (VTX:ZEHN) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Zehnder Group

How Much Debt Does Zehnder Group Carry?

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 Healthy Is Zehnder Group's Balance Sheet?

We can see from the most recent balance sheet that Zehnder Group had liabilities of €136.6m falling due within a year, and liabilities of €35.0m due beyond that. Offsetting these obligations, it had cash of €106.3m as well as receivables valued at €131.5m due within 12 months. So it actually has €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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, Zehnder Group recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zehnder Group has net cash of €96.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in €79m. So is Zehnder Group's debt a risk? It doesn't seem so to us. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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