Is Swatch Group (VTX:UHR) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, The Swatch Group AG (VTX:UHR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Swatch Group

How Much Debt Does Swatch Group Carry?

As you can see below, Swatch Group had CHF16.0m of debt at June 2021, down from CHF191.0m a year prior. But it also has CHF1.99b in cash to offset that, meaning it has CHF1.97b net cash.

How Healthy Is Swatch Group's Balance Sheet?

The latest balance sheet data shows that Swatch Group had liabilities of CHF1.18b due within a year, and liabilities of CHF751.0m falling due after that. Offsetting this, it had CHF1.99b in cash and CHF762.0m in receivables that were due within 12 months. So it can boast CHF818.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Swatch Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Swatch Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Swatch Group grew its EBIT by 456% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Swatch Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 recorded free cash flow worth a fulsome 100% 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 it is always sensible to investigate a company's debt, in this case Swatch Group has CHF1.97b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CHF1.1b, being 100% of its EBIT. 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.

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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