The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Metall Zug AG (VTX:METN) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Metall Zug Carry?
The image below, which you can click on for greater detail, shows that at December 2018 Metall Zug had debt of CHF5.48m, up from CHF240.0k in one year. But it also has CHF227.1m in cash to offset that, meaning it has CHF221.7m net cash.
A Look At Metall Zug’s Liabilities
The latest balance sheet data shows that Metall Zug had liabilities of CHF260.3m due within a year, and liabilities of CHF79.5m falling due after that. Offsetting these obligations, it had cash of CHF227.1m as well as receivables valued at CHF209.1m due within 12 months. So it can boast CHF96.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Metall Zug could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Metall Zug boasts net cash, so it’s fair to say it does not have a heavy debt load!
On top of that, Metall Zug grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. 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 Metall Zug’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 business needs free cash flow to pay off debt; accounting profits just don’t cut it. While Metall Zug has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Metall Zug actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Metall Zug has net cash of CHF222m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CHF249m, being 131% of its EBIT. So we don’t think Metall Zug’s use of debt is risky. Given Metall Zug has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.