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.' 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. Importantly, SÜSS MicroTec SE (ETR:SMHN) does carry debt. But the more important question is: how much risk is that debt creating?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SÜSS MicroTec

What Is SÜSS MicroTec's Debt?

As you can see below, SÜSS MicroTec had €6.30m of debt at March 2024, down from €7.48m a year prior. However, it does have €118.4m in cash offsetting this, leading to net cash of €112.1m.

How Strong Is SÜSS MicroTec's Balance Sheet?

The latest balance sheet data shows that SÜSS MicroTec had liabilities of €143.5m due within a year, and liabilities of €30.9m falling due after that. Offsetting this, it had €118.4m in cash and €49.0m in receivables that were due within 12 months. So its liabilities total €7.00m more than the combination of its cash and short-term receivables.

Having regard to SÜSS MicroTec's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.17b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

And we also note warmly that SÜSS MicroTec grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SÜSS MicroTec can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SÜSS MicroTec has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, SÜSS MicroTec's free cash flow amounted to 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about SÜSS MicroTec's liabilities, but we can be reassured by the fact it has has net cash of €112.1m. And we liked the look of last year's 19% year-on-year EBIT growth. So we are not troubled with SÜSS MicroTec's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for SÜSS MicroTec (1 is a bit concerning!) that you should be aware of before investing here.

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.