Is SÜSS MicroTec (ETR:SMHN) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that SÜSS MicroTec SE (ETR:SMHN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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

View our latest analysis for SÜSS MicroTec

How Much Debt Does SÜSS MicroTec Carry?

You can click the graphic below for the historical numbers, but it shows that SÜSS MicroTec had €6.88m of debt in September 2023, down from €8.09m, one year before. But it also has €47.7m in cash to offset that, meaning it has €40.8m net cash.

A Look At SÜSS MicroTec's Liabilities

Zooming in on the latest balance sheet data, we can see that SÜSS MicroTec had liabilities of €157.7m due within 12 months and liabilities of €24.2m due beyond that. On the other hand, it had cash of €47.7m and €42.3m worth of receivables due within a year. So its liabilities total €91.9m more than the combination of its cash and short-term receivables.

Given SÜSS MicroTec has a market capitalization of €771.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, SÜSS MicroTec boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that SÜSS MicroTec has boosted its EBIT by 97%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SÜSS MicroTec'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. 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 most recent three years, SÜSS MicroTec recorded free cash flow worth 60% 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 SÜSS MicroTec does have more liabilities than liquid assets, it also has net cash of €40.8m. And it impressed us with its EBIT growth of 97% over the last year. So is SÜSS MicroTec'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. For instance, we've identified 1 warning sign for SÜSS MicroTec that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.