Landis+Gyr Group (VTX:LAND) Has A Pretty Healthy Balance Sheet

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. As with many other companies Landis+Gyr Group AG (VTX:LAND) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Landis+Gyr Group

What Is Landis+Gyr Group's Debt?

As you can see below, Landis+Gyr Group had US$147.7m of debt at March 2021, down from US$352.2m a year prior. On the flip side, it has US$140.5m in cash leading to net debt of about US$7.12m.

How Healthy Is Landis+Gyr Group's Balance Sheet?

The latest balance sheet data shows that Landis+Gyr Group had liabilities of US$518.6m due within a year, and liabilities of US$265.1m falling due after that. On the other hand, it had cash of US$140.5m and US$282.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$361.0m.

Given Landis+Gyr Group has a market capitalization of US$2.05b, 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. Carrying virtually no net debt, Landis+Gyr Group has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). 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).

Landis+Gyr Group's net debt to EBITDA ratio is very low, at 0.061, suggesting the debt is only trivial. But EBIT was only 4.8 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. Importantly, Landis+Gyr Group's EBIT fell a jaw-dropping 79% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Landis+Gyr Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Landis+Gyr Group recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Based on what we've seen Landis+Gyr Group is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to convert EBIT to free cash flow is pretty flash. Considering this range of data points, we think Landis+Gyr Group 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. 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. We've identified 1 warning sign with Landis+Gyr Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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