SKAN Group (VTX:SKAN) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies SKAN Group AG (VTX:SKAN) makes use of debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does SKAN Group Carry?

The image below, which you can click on for greater detail, shows that SKAN Group had debt of CHF5.48m at the end of December 2024, a reduction from CHF6.30m over a year. But it also has CHF61.7m in cash to offset that, meaning it has CHF56.2m net cash.

How Healthy Is SKAN Group's Balance Sheet?

We can see from the most recent balance sheet that SKAN Group had liabilities of CHF162.7m falling due within a year, and liabilities of CHF19.3m due beyond that. On the other hand, it had cash of CHF61.7m and CHF40.4m worth of receivables due within a year. So its liabilities total CHF79.8m more than the combination of its cash and short-term receivables.

Of course, SKAN Group has a market capitalization of CHF1.62b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SKAN Group boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for SKAN Group

And we also note warmly that SKAN Group grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SKAN Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SKAN Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, SKAN Group actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

We could understand if investors are concerned about SKAN Group's liabilities, but we can be reassured by the fact it has has net cash of CHF56.2m. And it impressed us with its EBIT growth of 18% over the last year. So we are not troubled with SKAN Group's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with SKAN Group .

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.