Does Swatch Group (VTX:UHR) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies The Swatch Group AG (VTX:UHR) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Swatch Group

What Is Swatch Group's Debt?

As you can see below, at the end of December 2021, Swatch Group had CHF100.0m of debt, up from CHF95.0m a year ago. Click the image for more detail. But on the other hand it also has CHF2.66b in cash, leading to a CHF2.56b net cash position.

How Strong Is Swatch Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Swatch Group had liabilities of CHF1.38b due within 12 months and liabilities of CHF696.0m due beyond that. Offsetting these obligations, it had cash of CHF2.66b as well as receivables valued at CHF846.0m due within 12 months. So it can boast CHF1.43b more liquid assets than total liabilities.

This surplus suggests that Swatch Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Swatch Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Swatch Group grew its EBIT by 987% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Swatch 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. While Swatch Group 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. Over the last three years, Swatch 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 Swatch Group has CHF2.56b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in CHF1.0b. So is Swatch 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 Swatch Group's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.