We Think Watches of Switzerland Group (LON:WOSG) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Watches of Switzerland Group plc (LON:WOSG) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Watches of Switzerland Group

What Is Watches of Switzerland Group's Debt?

The chart below, which you can click on for greater detail, shows that Watches of Switzerland Group had UK£120.0m in debt in April 2023; about the same as the year before. However, it does have UK£136.4m in cash offsetting this, leading to net cash of UK£16.4m.

How Strong Is Watches of Switzerland Group's Balance Sheet?

We can see from the most recent balance sheet that Watches of Switzerland Group had liabilities of UK£272.8m falling due within a year, and liabilities of UK£492.9m due beyond that. On the other hand, it had cash of UK£136.4m and UK£14.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£614.9m.

This deficit isn't so bad because Watches of Switzerland Group is worth UK£1.21b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Watches of Switzerland Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Watches of Switzerland Group grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Watches of Switzerland Group 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, a company can only pay off debt with cold hard cash, not accounting profits. While Watches of Switzerland Group 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. Over the last three years, Watches of Switzerland Group recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Watches of Switzerland Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£16.4m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in UK£134m. So we don't think Watches of Switzerland Group's use of debt is risky. 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 example, we've discovered 1 warning sign for Watches of Switzerland Group that you should be aware of before investing here.

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.