Here's Why Landis+Gyr Group (VTX:LAND) Can Manage Its Debt Responsibly

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 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. Importantly, Landis+Gyr Group AG (VTX:LAND) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 Landis+Gyr Group

What Is Landis+Gyr Group's Debt?

As you can see below, at the end of September 2020, Landis+Gyr Group had US$357.0m of debt, up from US$135.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$368.9m in cash, so it actually has US$11.9m net cash.

A Look At Landis+Gyr Group's Liabilities

According to the last reported balance sheet, Landis+Gyr Group had liabilities of US$688.2m due within 12 months, and liabilities of US$288.4m due beyond 12 months. Offsetting this, it had US$368.9m in cash and US$235.7m in receivables that were due within 12 months. So it has liabilities totalling US$372.0m more than its cash and near-term receivables, combined.

Given Landis+Gyr Group has a market capitalization of US$2.34b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Landis+Gyr Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Landis+Gyr Group's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Landis+Gyr Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Landis+Gyr Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Landis+Gyr Group recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Landis+Gyr Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$11.9m. And it impressed us with free cash flow of US$133m, being 89% of its EBIT. So we are not troubled with Landis+Gyr Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Landis+Gyr Group that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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