Société de Services de Participations de Direction et d'Elaboration Société anonyme (EBR:SPA) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Société de Services, de Participations, de Direction et d'Elaboration Société anonyme (EBR:SPA) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

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

What Is Société de Services de Participations de Direction et d'Elaboration Société anonyme's Net 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 Société anonyme had €10.5m of debt in December 2021, down from €24.5m, one year before. But on the other hand it also has €87.9m in cash, leading to a €77.4m net cash position.

A Look At Société de Services de Participations de Direction et d'Elaboration Société anonyme's Liabilities

The latest balance sheet data shows that Société de Services de Participations de Direction et d'Elaboration Société anonyme had liabilities of €108.4m due within a year, and liabilities of €38.7m falling due after that. On the other hand, it had cash of €87.9m and €50.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.72m.

Having regard to Société de Services de Participations de Direction et d'Elaboration Société anonyme's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €747.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Société de Services de Participations de Direction et d'Elaboration Société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Société de Services de Participations de Direction et d'Elaboration Société anonyme grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Société de Services de Participations de Direction et d'Elaboration Société anonyme's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Société de Services de Participations de Direction et d'Elaboration Société anonyme 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 most recent three years, Société de Services de Participations de Direction et d'Elaboration Société anonyme recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Société anonyme has €77.4m in net cash. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in €28m. So we don't think Société de Services de Participations de Direction et d'Elaboration Société anonyme'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 Société anonyme's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.