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

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.' 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. We note that The Swatch Group AG (VTX:UHR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Swatch Group

What Is Swatch Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Swatch Group had debt of CHF100.0m, up from CHF95.0m in one year. However, it does have CHF2.65b in cash offsetting this, leading to net cash of CHF2.55b.

A Look At Swatch Group's Liabilities

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 CHF2.65b as well as receivables valued at CHF863.0m due within 12 months. So it can boast CHF1.44b 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 1,865% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 CHF2.55b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CHF1.0b, being 113% of its EBIT. So we don't think Swatch Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Swatch Group you should be aware of.

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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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.