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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SCR-Sibelco N.V. (EBR:094426466) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for SCR-Sibelco
What Is SCR-Sibelco's Debt?
The image below, which you can click on for greater detail, shows that at December 2022 SCR-Sibelco had debt of €455.2m, up from €89.9m in one year. However, its balance sheet shows it holds €569.6m in cash, so it actually has €114.4m net cash.
How Strong Is SCR-Sibelco's Balance Sheet?
The latest balance sheet data shows that SCR-Sibelco had liabilities of €644.9m due within a year, and liabilities of €832.1m falling due after that. Offsetting this, it had €569.6m in cash and €437.8m in receivables that were due within 12 months. So its liabilities total €469.6m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because SCR-Sibelco is worth €1.95b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, SCR-Sibelco also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, SCR-Sibelco grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SCR-Sibelco 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. SCR-Sibelco 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. Happily for any shareholders, SCR-Sibelco actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
Although SCR-Sibelco's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €114.4m. And it impressed us with free cash flow of €178m, being 108% of its EBIT. So we don't think SCR-Sibelco's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SCR-Sibelco is showing 2 warning signs in our investment analysis , and 1 of those is concerning...
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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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.
About ENXTBR:094426466
SCR-Sibelco
Explores, develops, produces, and sells industrial minerals in Belgium and internationally.
Solid track record with excellent balance sheet.