Zehnder Group (VTX:ZEHN) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Zehnder Group AG (VTX:ZEHN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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

How Much Debt Does Zehnder Group Carry?

As you can see below, Zehnder Group had €28.2m of debt at June 2023, down from €38.4m a year prior. However, its balance sheet shows it holds €52.5m in cash, so it actually has €24.3m 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 €173.8m falling due within a year, and liabilities of €27.8m due beyond that. Offsetting this, it had €52.5m in cash and €148.4m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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 €615.8m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Zehnder Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Zehnder Group grew its EBIT by 6.7% in the last year, making that debt load look even more manageable. 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, 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. During the last three years, Zehnder Group produced sturdy free cash flow equating to 70% 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 Zehnder Group's liabilities, but we can be reassured by the fact it has has net cash of €24.3m. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in €42m. So is Zehnder Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Zehnder Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.