Yahoo Finance Watches of Switzerland Group (LON:WOSG) Seems To Use Debt Rather Sparingly
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. 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.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Watches of Switzerland Group
What Is Watches of Switzerland Group's Debt?
The image below, which you can click on for greater detail, shows that Watches of Switzerland Group had debt of UK£118.3m at the end of October 2021, a reduction from UK£139.7m over a year. However, it does have UK£150.0m in cash offsetting this, leading to net cash of UK£31.8m.
How Healthy 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£233.3m falling due within a year, and liabilities of UK£385.5m due beyond that. Offsetting this, it had UK£150.0m in cash and UK£11.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£457.4m.
Since publicly traded Watches of Switzerland Group shares are worth a total of UK£3.39b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Watches of Switzerland Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Watches of Switzerland Group has boosted its EBIT by 73%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Watches of Switzerland Group'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. Watches of Switzerland Group 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. Happily for any shareholders, Watches of Switzerland Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While Watches of Switzerland Group does have more liabilities than liquid assets, it also has net cash of UK£31.8m. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in UK£119m. So we don't think Watches of Switzerland Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Watches of Switzerland Group is showing 2 warning signs in our investment analysis , 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.
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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.
