Swatch Group (VTX:UHR) Seems To Use Debt Rather Sparingly

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. Importantly, The Swatch Group AG (VTX:UHR) does carry debt. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Swatch Group

What Is Swatch Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Swatch Group had CHF68.0m of debt, an increase on CHF16.0m, over one year. However, it does have CHF2.46b in cash offsetting this, leading to net cash of CHF2.40b.

How Healthy Is Swatch Group's Balance Sheet?

The latest balance sheet data shows that Swatch Group had liabilities of CHF1.29b due within a year, and liabilities of CHF703.0m falling due after that. Offsetting these obligations, it had cash of CHF2.46b as well as receivables valued at CHF839.0m due within 12 months. So it can boast CHF1.31b 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.

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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Swatch Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Swatch Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Swatch Group has net cash of CHF2.40b, as well as more liquid assets than liabilities. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in CHF726m. 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. For example - Swatch Group has 1 warning sign we think you should be aware of.

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.