These 4 Measures Indicate That Swatch Group (VTX:UHR) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies The Swatch Group AG (VTX:UHR) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 Swatch Group had debt of CHF16.0m at the end of June 2021, a reduction from CHF191.0m over a year. But on the other hand it also has CHF1.99b in cash, leading to a CHF1.97b net cash position.

How Strong Is Swatch Group's Balance Sheet?

According to the last reported balance sheet, Swatch Group had liabilities of CHF1.18b due within 12 months, and liabilities of CHF751.0m due beyond 12 months. On the other hand, it had cash of CHF1.99b and CHF762.0m worth of receivables due within a year. So it actually has 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. Simply put, the fact that Swatch Group has more cash than debt is arguably a good indication that it can manage its debt safely.

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. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, Swatch Group generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in CHF1.1b. So is Swatch Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Swatch Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.

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