These 4 Measures Indicate That SÜSS MicroTec (ETR:SMHN) Is Using Debt Safely

Simply Wall St · 10/16 04:02

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that SÜSS MicroTec SE (ETR:SMHN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SÜSS MicroTec

How Much Debt Does SÜSS MicroTec Carry?

As you can see below, SÜSS MicroTec had €6.00m of debt at June 2024, down from €7.18m a year prior. But on the other hand it also has €136.6m in cash, leading to a €130.6m net cash position.

debt-equity-history-analysis
XTRA:SMHN Debt to Equity History October 16th 2024

How Healthy Is SÜSS MicroTec's Balance Sheet?

According to the last reported balance sheet, SÜSS MicroTec had liabilities of €165.1m due within 12 months, and liabilities of €30.5m due beyond 12 months. Offsetting this, it had €136.6m in cash and €42.5m in receivables that were due within 12 months. So it has liabilities totalling €16.4m more than its cash and near-term receivables, combined.

This state of affairs indicates that SÜSS MicroTec's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €1.20b 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.

Also positive, SÜSS MicroTec grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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. 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. Over the most recent three years, SÜSS MicroTec recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €130.6m. And it impressed us with its EBIT growth of 27% over the last year. So is SÜSS MicroTec's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SÜSS MicroTec you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.