Does Swiss Steel Holding (VTX:STLN) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Swiss Steel Holding AG (VTX:STLN) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Swiss Steel Holding

What Is Swiss Steel Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Swiss Steel Holding had €902.6m of debt in June 2023, down from €969.9m, one year before. However, because it has a cash reserve of €31.4m, its net debt is less, at about €871.2m.

A Look At Swiss Steel Holding's Liabilities

According to the last reported balance sheet, Swiss Steel Holding had liabilities of €1.11b due within 12 months, and liabilities of €807.4m due beyond 12 months. On the other hand, it had cash of €31.4m and €549.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.34b.

This deficit casts a shadow over the €296.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Swiss Steel Holding would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Swiss Steel Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Swiss Steel Holding's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Swiss Steel Holding had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €13m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of €96m in the last year. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Swiss Steel Holding that you should be aware of before investing here.

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.