Zehnder Group (VTX:ZEHN) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zehnder Group AG (VTX:ZEHN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zehnder Group

What Is Zehnder Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Zehnder Group had €38.4m of debt, an increase on €10.4m, over one year. But it also has €61.8m in cash to offset that, meaning it has €23.4m net cash.

How Strong Is Zehnder Group's Balance Sheet?

The latest balance sheet data shows that Zehnder Group had liabilities of €197.8m due within a year, and liabilities of €38.8m falling due after that. Offsetting this, it had €61.8m in cash and €167.8m in receivables that were due within 12 months. So its liabilities total €7.00m more than the combination of its cash and short-term receivables.

Having regard to Zehnder Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €590.5m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zehnder Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Zehnder Group saw its EBIT drop by 6.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zehnder Group has €23.4m in net cash. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in €25m. So we don't think Zehnder Group's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Zehnder Group you should be aware of.

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. 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.