Is Swatch Group (VTX:UHR) Using Too Much Debt?

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Swatch Group

How Much Debt Does Swatch Group Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Swatch Group had debt of CHF68.0m, up from CHF16.0m in one year. But it also has CHF2.46b in cash to offset that, meaning it has CHF2.40b net cash.

How Strong Is Swatch Group's Balance Sheet?

According to the last reported balance sheet, Swatch Group had liabilities of CHF1.29b due within 12 months, and liabilities of CHF703.0m due beyond 12 months. On the other hand, it had cash of CHF2.46b and CHF839.0m worth of receivables due within a year. So it can boast CHF1.31b 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!

In addition to that, we're happy to report that Swatch Group has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. 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. Happily for any shareholders, Swatch Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Swatch Group has CHF2.40b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CHF726m, being 115% of its EBIT. So is Swatch 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. To that end, you should be aware of the 1 warning sign we've spotted with Swatch Group .

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.