Is Schaffner Holding (VTX:SAHN) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Schaffner Holding AG (VTX:SAHN) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Schaffner Holding

How Much Debt Does Schaffner Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Schaffner Holding had CHF11.5m of debt in September 2021, down from CHF33.6m, one year before. But it also has CHF25.5m in cash to offset that, meaning it has CHF14.0m net cash.

How Strong Is Schaffner Holding's Balance Sheet?

According to the last reported balance sheet, Schaffner Holding had liabilities of CHF35.9m due within 12 months, and liabilities of CHF16.5m due beyond 12 months. On the other hand, it had cash of CHF25.5m and CHF29.3m worth of receivables due within a year. So it actually has CHF2.40m more liquid assets than total liabilities.

This state of affairs indicates that Schaffner Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CHF188.5m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Schaffner Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Schaffner Holding grew its EBIT by 250% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Schaffner 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Schaffner Holding 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. Over the most recent three years, Schaffner Holding recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Schaffner Holding has net cash of CHF14.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 250% over the last year. So we don't think Schaffner Holding's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Schaffner Holding you should be aware of.

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.