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Société de Services de Participations de Direction et d'Elaboration (EBR:SPA) Could Easily Take On More Debt

Simply Wall St

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. Importantly, Société de Services, de Participations, de Direction et d'Elaboration (EBR:SPA) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View our latest analysis for Société de Services de Participations de Direction et d'Elaboration

What Is Société de Services de Participations de Direction et d'Elaboration's Debt?

You can click the graphic below for the historical numbers, but it shows that Société de Services de Participations de Direction et d'Elaboration had €14.0m of debt in June 2019, down from €59.5m, one year before. But it also has €65.3m in cash to offset that, meaning it has €51.3m net cash.

ENXTBR:SPA Historical Debt, September 14th 2019

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. On the other hand, it had cash of €65.3m and €81.6m worth of receivables due within a year. So it has liabilities totalling €55.7m more than its cash and near-term receivables, combined.

Of course, Société de Services de Participations de Direction et d'Elaboration has a market capitalization of €809.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 €51m in net cash. And we liked the look of last year's 89% year-on-year EBIT growth. So we don't think Société de Services de Participations de Direction et d'Elaboration'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 Société de Services de Participations de Direction et d'Elaboration's earnings per share history for free.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.