Is Swiss Steel Holding (VTX:STLN) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Swiss Steel Holding AG (VTX:STLN) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Swiss Steel Holding

What Is Swiss Steel Holding's Debt?

As you can see below, Swiss Steel Holding had €604.8m of debt at September 2020, down from €703.3m a year prior. However, because it has a cash reserve of €60.1m, its net debt is less, at about €544.7m.

How Healthy Is Swiss Steel Holding's Balance Sheet?

We can see from the most recent balance sheet that Swiss Steel Holding had liabilities of €612.2m falling due within a year, and liabilities of €890.8m due beyond that. Offsetting these obligations, it had cash of €60.1m as well as receivables valued at €351.5m due within 12 months. So its liabilities total €1.09b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €434.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Swiss Steel Holding would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Swiss Steel Holding'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.

In the last year Swiss Steel Holding had a loss before interest and tax, and actually shrunk its revenue by 27%, to €2.3b. To be frank that doesn't bode well.

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). Indeed, it lost a very considerable €168m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through €131m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Swiss Steel Holding (at least 2 which are significant) , and understanding them should be part of your investment process.

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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