Is Schweizer Electronic (ETR:SCE) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Schweizer Electronic AG (ETR:SCE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Schweizer Electronic

How Much Debt Does Schweizer Electronic Carry?

The image below, which you can click on for greater detail, shows that Schweizer Electronic had debt of €23.6m at the end of March 2024, a reduction from €30.2m over a year. However, because it has a cash reserve of €5.49m, its net debt is less, at about €18.1m.

How Healthy Is Schweizer Electronic's Balance Sheet?

The latest balance sheet data shows that Schweizer Electronic had liabilities of €39.4m due within a year, and liabilities of €44.2m falling due after that. Offsetting this, it had €5.49m in cash and €41.2m in receivables that were due within 12 months. So its liabilities total €37.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €16.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Schweizer Electronic would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Schweizer Electronic 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.

In the last year Schweizer Electronic wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, to €141m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Schweizer Electronic produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €468k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of €6.1m and the profit of €35m. So there is definitely a chance that it can improve things in the next few years. 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 example Schweizer Electronic has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

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.