Here's Why Swiss Prime Site (VTX:SPSN) Can Manage Its Debt Responsibly

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.' 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 Swiss Prime Site AG (VTX:SPSN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Swiss Prime Site

What Is Swiss Prime Site's Net Debt?

The chart below, which you can click on for greater detail, shows that Swiss Prime Site had CHF5.35b in debt in June 2020; about the same as the year before. However, it does have CHF361.7m in cash offsetting this, leading to net debt of about CHF4.98b.

A Look At Swiss Prime Site's Liabilities

According to the last reported balance sheet, Swiss Prime Site had liabilities of CHF1.75b due within 12 months, and liabilities of CHF4.99b due beyond 12 months. Offsetting this, it had CHF361.7m in cash and CHF96.9m in receivables that were due within 12 months. So its liabilities total CHF6.27b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CHF6.28b, so it does suggest shareholders should keep an eye on Swiss Prime Site's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Swiss Prime Site's debt to EBITDA ratio of 8.3 suggests a heavy debt load, its interest coverage of 9.2 implies it services that debt with ease. Overall we'd say it seems likely the company is carrying a fairly heavy swag of debt. It is well worth noting that Swiss Prime Site's EBIT shot up like bamboo after rain, gaining 41% in the last twelve months. That'll make it easier to manage its debt. 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 Swiss Prime Site'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Swiss Prime Site produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Swiss Prime Site's net debt to EBITDA was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its EBIT growth rate. Considering this range of data points, we think Swiss Prime Site is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. To that end, you should learn about the 3 warning signs we've spotted with Swiss Prime Site (including 2 which is are concerning) .

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. 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.
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