We Think SCHOTT Pharma KGaA (ETR:1SXP) Can Stay On Top Of Its Debt

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. We can see that SCHOTT Pharma AG & Co. KGaA (ETR:1SXP) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is SCHOTT Pharma KGaA's Debt?

As you can see below, at the end of December 2024, SCHOTT Pharma KGaA had €230.2m of debt, up from €112.8m a year ago. Click the image for more detail. On the flip side, it has €16.8m in cash leading to net debt of about €213.4m.

How Healthy Is SCHOTT Pharma KGaA's Balance Sheet?

The latest balance sheet data shows that SCHOTT Pharma KGaA had liabilities of €437.4m due within a year, and liabilities of €210.7m falling due after that. Offsetting this, it had €16.8m in cash and €410.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €220.8m.

Given SCHOTT Pharma KGaA has a market capitalization of €3.53b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

See our latest analysis for SCHOTT Pharma KGaA

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

SCHOTT Pharma KGaA's net debt is only 0.87 times its EBITDA. And its EBIT covers its interest expense a whopping 22.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, SCHOTT Pharma KGaA grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SCHOTT Pharma KGaA's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, SCHOTT Pharma KGaA recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, SCHOTT Pharma KGaA's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. All these things considered, it appears that SCHOTT Pharma KGaA can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of SCHOTT Pharma KGaA's earnings per share history for free.

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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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.