Here's Why Swiss Steel Holding (VTX:STLN) Can Afford Some Debt

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.' 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. We can see that Swiss Steel Holding AG (VTX:STLN) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Swiss Steel Holding

What Is Swiss Steel Holding's Net Debt?

As you can see below, at the end of March 2021, Swiss Steel Holding had €621.6m of debt, up from €588.2m a year ago. Click the image for more detail. However, because it has a cash reserve of €169.0m, its net debt is less, at about €452.6m.

How Healthy Is Swiss Steel Holding's Balance Sheet?

The latest balance sheet data shows that Swiss Steel Holding had liabilities of €820.1m due within a year, and liabilities of €809.5m falling due after that. Offsetting this, it had €169.0m in cash and €484.4m in receivables that were due within 12 months. So it has liabilities totalling €976.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €1.33b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Swiss Steel Holding 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.

In the last year Swiss Steel Holding had a loss before interest and tax, and actually shrunk its revenue by 17%, to €2.3b. We would much prefer see growth.

Caveat Emptor

Not only did Swiss Steel Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €119m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €103m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Swiss Steel Holding (of which 1 can't be ignored!) you should know about.

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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