Is Metall Zug (VTX:METN) Using Too Much 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. Importantly, Metall Zug AG (VTX:METN) does carry debt. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Metall Zug
What Is Metall Zug's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Metall Zug had CHF5.24m of debt in June 2019, down from CHF9.31m, one year before. However, its balance sheet shows it holds CHF147.7m in cash, so it actually has CHF142.5m net cash.
How Healthy Is Metall Zug's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Metall Zug had liabilities of CHF239.0m due within 12 months and liabilities of CHF92.4m due beyond that. Offsetting this, it had CHF147.7m in cash and CHF198.3m in receivables that were due within 12 months. So it actually has CHF14.6m more liquid assets than total liabilities.
This state of affairs indicates that Metall Zug'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 CHF954.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Metall Zug boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Metall Zug's load is not too heavy, because its EBIT was down 27% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Metall Zug's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Metall Zug 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. Over the last three years, Metall Zug actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While it is always sensible to investigate a company's debt, in this case Metall Zug has CHF142.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 160% of that EBIT to free cash flow, bringing in CHF43m. So we don't have any problem with Metall Zug's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Metall Zug's dividend history, without delay!
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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