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. Importantly, Foncière Volta (EPA:SPEL) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Foncière Volta's Debt?
You can click the graphic below for the historical numbers, but it shows that Foncière Volta had €83.3m of debt in June 2019, down from €88.1m, one year before. But on the other hand it also has €103.7m in cash, leading to a €20.4m net cash position.
How Healthy Is Foncière Volta's Balance Sheet?
The latest balance sheet data shows that Foncière Volta had liabilities of €67.4m due within a year, and liabilities of €78.5m falling due after that. Offsetting this, it had €103.7m in cash and €8.86m in receivables that were due within 12 months. So it has liabilities totalling €33.4m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Foncière Volta is worth €77.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Foncière Volta also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, Foncière Volta grew its EBIT by 921% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Foncière Volta will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Foncière Volta 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, Foncière Volta 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.
Although Foncière Volta's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €20.4m. And it impressed us with free cash flow of €107m, being 132% of its EBIT. So we don't think Foncière Volta's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Foncière Volta's earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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