Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Sniace, S.A. (BME:SNC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
How Much Debt Does Sniace Carry?
You can click the graphic below for the historical numbers, but it shows that Sniace had €19.8m of debt in March 2019, down from €22.4m, one year before. On the flip side, it has €2.41m in cash leading to net debt of about €17.4m.
A Look At Sniace's Liabilities
We can see from the most recent balance sheet that Sniace had liabilities of €43.0m falling due within a year, and liabilities of €69.9m due beyond that. Offsetting these obligations, it had cash of €2.41m as well as receivables valued at €10.6m due within 12 months. So it has liabilities totalling €99.9m more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of €87.7m, we think shareholders really should watch Sniace's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sniace's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Sniace managed to grow its revenue by 34%, to €68m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Even though Sniace managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable €13m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €27m over the last twelve months. So suffice it to say we consider the stock to be risky. For riskier companies like Sniace I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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