Is SÜSS MicroTec (ETR:SMHN) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that SÜSS MicroTec SE (ETR:SMHN) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SÜSS MicroTec

What Is SÜSS MicroTec's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SÜSS MicroTec had €8.71m of debt in March 2022, down from €10.2m, one year before. However, it does have €53.5m in cash offsetting this, leading to net cash of €44.8m.

How Strong Is SÜSS MicroTec's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SÜSS MicroTec had liabilities of €97.4m due within 12 months and liabilities of €31.6m due beyond that. On the other hand, it had cash of €53.5m and €41.2m worth of receivables due within a year. So it has liabilities totalling €34.4m more than its cash and near-term receivables, combined.

Of course, SÜSS MicroTec has a market capitalization of €321.5m, 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. Despite its noteworthy liabilities, SÜSS MicroTec boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that SÜSS MicroTec has seen its EBIT plunge 13% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, SÜSS MicroTec actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although SÜSS MicroTec's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €44.8m. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in €7.2m. So we are not troubled with SÜSS MicroTec's debt use. 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 SÜSS MicroTec's earnings per share history for free.

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.