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

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?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

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 Swatch Group had debt of CHF27.0m at the end of June 2023, a reduction from CHF68.0m over a year. But on the other hand it also has CHF2.12b in cash, leading to a CHF2.10b net cash position.

A Look At Swatch Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Swatch Group had liabilities of CHF1.23b due within 12 months and liabilities of CHF739.0m due beyond that. Offsetting this, it had CHF2.12b in cash and CHF838.0m in receivables that were due within 12 months. So it actually has CHF996.0m 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. Succinctly put, Swatch Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Swatch Group grew its EBIT by 19% last year, making its debt load easier to handle. 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.

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. Over the most recent three years, Swatch Group recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Swatch Group has CHF2.10b in net cash and a decent-looking balance sheet. And we liked the look of last year's 19% year-on-year EBIT growth. 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. For example, we've discovered 1 warning sign for Swatch Group that you should be aware of before investing here.

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.