Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Secanda SA (FRA:II8) has a debt on its balance sheet. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Secanda
What is Secanda’s debt?
The image below, which you can click on for more details, shows that Secanda had a debt of €2.55m at the end of June 2022, a reduction of €3.90m over one year. But on the other hand, he also has 3.64 million euros in cash, which leads to a net cash of 1.09 million euros.
How healthy is Secanda’s balance sheet?
According to the last published balance sheet, Secanda had liabilities of €6.00 million maturing within 12 months and liabilities of €3.39 million maturing beyond 12 months. On the other hand, it had €3.64 million in cash and €2.59 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €3.14 million.
Secanda has a market capitalization of 12.2 million euros, so it could very likely raise funds to improve its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky. Despite its notable liabilities, Secanda has a net cash position, so it’s fair to say that it is not very leveraged!
Shareholders should know that Secanda’s EBIT fell 23% last year. If this earnings trend continues, paying off debt will be about as easy as herding cats on a roller coaster. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Secanda can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Secanda may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Secanda has recorded a free cash flow of 28% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.
Although Secanda has more liabilities than liquid assets, it also has a net cash position of 1.09 million euros. So even though Secanda doesn’t have a great track record, it’s certainly not that bad. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for Secanda of which you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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