We Think SÜSS MicroTec (ETR:SMHN) Can Stay On Top Of Its 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. 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.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt 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 €8.40m at the end of June 2022, a reduction from €9.64m over a year. But on the other hand it also has €53.4m in cash, leading to a €45.0m net cash position.

How Healthy Is SÜSS MicroTec's Balance Sheet?

The latest balance sheet data shows that SÜSS MicroTec had liabilities of €115.0m due within a year, and liabilities of €30.4m falling due after that. Offsetting these obligations, it had cash of €53.4m as well as receivables valued at €41.4m due within 12 months. So it has liabilities totalling €50.7m more than its cash and near-term receivables, combined.

SÜSS MicroTec has a market capitalization of €215.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, SÜSS MicroTec boasts net cash, so it's fair to say it does not have a heavy debt load!

While SÜSS MicroTec doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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, 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. During the last three years, SÜSS MicroTec generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While SÜSS MicroTec does have more liabilities than liquid assets, it also has net cash of €45.0m. And it impressed us with free cash flow of €19m, being 95% of its EBIT. So we don't think SÜSS MicroTec's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in SÜSS MicroTec, you may well want to click here to check an interactive graph of its earnings per share history.

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.