Here's Why SÜSS MicroTec (ETR:SMHN) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies SÜSS MicroTec SE (ETR:SMHN) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SÜSS MicroTec

What Is SÜSS MicroTec's Debt?

The image below, which you can click on for greater detail, shows that SÜSS MicroTec had debt of €8.09m at the end of September 2022, a reduction from €9.33m over a year. But on the other hand it also has €63.8m in cash, leading to a €55.7m net cash position.

A Look At SÜSS MicroTec's Liabilities

We can see from the most recent balance sheet that SÜSS MicroTec had liabilities of €139.7m falling due within a year, and liabilities of €36.4m due beyond that. On the other hand, it had cash of €63.8m and €35.1m worth of receivables due within a year. So it has liabilities totalling €77.2m more than its cash and near-term receivables, combined.

Since publicly traded SÜSS MicroTec shares are worth a total of €390.9m, 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. While it does have liabilities worth noting, SÜSS MicroTec also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that SÜSS MicroTec's load is not too heavy, because its EBIT was down 38% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SÜSS MicroTec can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SÜSS MicroTec 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, SÜSS MicroTec actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While SÜSS MicroTec does have more liabilities than liquid assets, it also has net cash of €55.7m. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in €42m. So we are not troubled with SÜSS MicroTec's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for SÜSS MicroTec that 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.