Is SCR-Sibelco (EBR:094426466) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SCR-Sibelco N.V. (EBR:094426466) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SCR-Sibelco

What Is SCR-Sibelco's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SCR-Sibelco had €368.7m of debt in December 2023, down from €455.2m, one year before. However, it does have €818.3m in cash offsetting this, leading to net cash of €449.6m.

How Healthy Is SCR-Sibelco's Balance Sheet?

We can see from the most recent balance sheet that SCR-Sibelco had liabilities of €773.1m falling due within a year, and liabilities of €956.2m due beyond that. On the other hand, it had cash of €818.3m and €471.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €439.2m.

Of course, SCR-Sibelco has a market capitalization of €2.63b, 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, SCR-Sibelco 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 SCR-Sibelco has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SCR-Sibelco has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, SCR-Sibelco actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While SCR-Sibelco does have more liabilities than liquid assets, it also has net cash of €449.6m. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in €466m. 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. For instance, we've identified 1 warning sign for SCR-Sibelco that you should be aware of.

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.