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

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, The Swatch Group AG (VTX:UHR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Swatch Group

What Is Swatch Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Swatch Group had debt of CHF77.0m, up from CHF10.0m in one year. But it also has CHF2.05b in cash to offset that, meaning it has CHF1.97b net cash.

A Look At Swatch Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Swatch Group had liabilities of CHF1.22b due within 12 months and liabilities of CHF751.0m due beyond that. Offsetting these obligations, it had cash of CHF2.05b as well as receivables valued at CHF884.0m due within 12 months. So it can boast CHF960.0m 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!

Fortunately, Swatch Group grew its EBIT by 2.8% in the last year, making that debt load look even more manageable. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Swatch Group's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Swatch Group has net cash of CHF1.97b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 2.8% in the last twelve months. So we are not troubled with Swatch Group's debt use. 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. For example, we've discovered 1 warning sign for Swatch Group that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.