Südwestdeutsche Salzwerke (FRA:SSH) Seems To Use Debt Rather Sparingly

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 the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Südwestdeutsche Salzwerke

How Much Debt Does Südwestdeutsche Salzwerke Carry?

As you can see below, at the end of June 2022, Südwestdeutsche Salzwerke had €3.75m of debt, up from €392.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds €49.4m in cash, so it actually has €45.7m net cash.

A Look At Südwestdeutsche Salzwerke's Liabilities

Zooming in on the latest balance sheet data, we can see that Südwestdeutsche Salzwerke had liabilities of €37.0m due within 12 months and liabilities of €107.3m due beyond that. Offsetting these obligations, it had cash of €49.4m as well as receivables valued at €48.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €46.3m.

Of course, Südwestdeutsche Salzwerke has a market capitalization of €998.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Südwestdeutsche Salzwerke also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Südwestdeutsche Salzwerke has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 most recent three years, Südwestdeutsche Salzwerke recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Südwestdeutsche Salzwerke has €45.7m in net cash. And it impressed us with its EBIT growth of 23% over the last year. So is Südwestdeutsche Salzwerke's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Südwestdeutsche Salzwerke 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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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.