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Société de Services de Participations de Direction et d'Elaboration (EBR:SPA) Has A Rock Solid Balance Sheet

Simply Wall St

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies Société de Services, de Participations, de Direction et d'Elaboration (EBR:SPA) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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 Société de Services de Participations de Direction et d'Elaboration

How Much Debt Does Société de Services de Participations de Direction et d'Elaboration Carry?

The chart below, which you can click on for greater detail, shows that Société de Services de Participations de Direction et d'Elaboration had €14.0m in debt in June 2019; about the same as the year before. However, it does have €65.3m in cash offsetting this, leading to net cash of €51.3m.

ENXTBR:SPA Historical Debt, March 23rd 2020

How Strong Is Société de Services de Participations de Direction et d'Elaboration's Balance Sheet?

We can see from the most recent balance sheet that Société de Services de Participations de Direction et d'Elaboration had liabilities of €131.1m falling due within a year, and liabilities of €71.5m due beyond that. Offsetting this, it had €65.3m in cash and €81.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €55.7m.

Of course, Société de Services de Participations de Direction et d'Elaboration has a market capitalization of €726.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Société de Services de Participations de Direction et d'Elaboration 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 Société de Services de Participations de Direction et d'Elaboration has boosted its EBIT by 89%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Société de Services de Participations de Direction et d'Elaboration 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Société de Services de Participations de Direction et d'Elaboration 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. During the last three years, Société de Services de Participations de Direction et d'Elaboration produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Société de Services de Participations de Direction et d'Elaboration has €51.3m in net cash. And it impressed us with its EBIT growth of 89% over the last year. So we don't think Société de Services de Participations de Direction et d'Elaboration's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Société de Services de Participations de Direction et d'Elaboration , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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