Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that Siegfried Holding AG (VTX: SFZN) uses debt in his business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.

See our latest analysis for Siegfried Holding

What is the debt of Siegfried Holding?

As you can see below, at the end of June 2021, Siegfried Holding had a debt of CHF 260.0 million, down from zero a year ago. Click on the image for more details. However, he has 59.4 million Swiss francs in cash to compensate for this, which leads to a net debt of around 200.6 million Swiss francs.

Is Siegfried Holding’s balance sheet healthy?

According to the latest published balance sheet, Siegfried Holding had liabilities of CHF 273.5 million within 12 months and liabilities of CHF 519.9 million over 12 months. In return, he had 59.4 million francs in cash and 244.3 million francs in receivables due within 12 months. It therefore has liabilities totaling 489.7 million francs more than its combined cash and short-term receivables.

Given that Siegfried Holding has a market capitalization of CHF 3.52 billion, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Siegfried Holding’s net debt is only 1.3 times its EBITDA. And its EBIT easily covers its interest costs, being 30.9 times greater. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, Siegfried Holding has increased its EBIT by 90% over the past twelve months, and this growth will make it easier to handle its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Siegfried Holding can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Siegfried Holding has generated strong free cash flow equivalent to 57% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.

Our point of view

Fortunately, Siegfried Holding’s impressive interest coverage means it has the upper hand on its debt. And that’s just the start of good news as its EBIT growth rate is also very encouraging. As you zoom out, Siegfried Holding appears to be using the debt quite sensibly; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a higher return on equity. Over time, stock prices tend to follow earnings per share, so if you are interested in Siegfried Holding, you may want to click here to view an interactive graph of its historical earnings per share.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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