Does Südwestdeutsche Salzwerke (FRA:SSH) Have A 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 Südwestdeutsche Salzwerke AG (FRA:SSH) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Südwestdeutsche Salzwerke

What Is Südwestdeutsche Salzwerke's Net Debt?

As you can see below, at the end of December 2023, Südwestdeutsche Salzwerke had €1.67m of debt, up from €385.0k a year ago. Click the image for more detail. But it also has €108.4m in cash to offset that, meaning it has €106.7m net cash.

A Look At Südwestdeutsche Salzwerke's Liabilities

We can see from the most recent balance sheet that Südwestdeutsche Salzwerke had liabilities of €50.4m falling due within a year, and liabilities of €160.7m due beyond that. On the other hand, it had cash of €108.4m and €61.8m worth of receivables due within a year. So it has liabilities totalling €41.0m more than its cash and near-term receivables, combined.

Since publicly traded Südwestdeutsche Salzwerke shares are worth a total of €598.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Südwestdeutsche Salzwerke boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Südwestdeutsche Salzwerke grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Südwestdeutsche Salzwerke's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Südwestdeutsche Salzwerke 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 last three years, Südwestdeutsche Salzwerke recorded free cash flow worth a fulsome 99% 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

We could understand if investors are concerned about Südwestdeutsche Salzwerke's liabilities, but we can be reassured by the fact it has has net cash of €106.7m. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in €64m. So we don't think Südwestdeutsche Salzwerke's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 Südwestdeutsche Salzwerke .

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.