These 4 Measures Indicate That SCR-Sibelco (EBR:094426466) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

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 SCR-Sibelco had debt of €89.9m at the end of December 2021, a reduction from €116.7m over a year. But it also has €305.9m in cash to offset that, meaning it has €215.9m net cash.

How Strong Is SCR-Sibelco's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SCR-Sibelco had liabilities of €483.0m due within 12 months and liabilities of €442.8m due beyond that. On the other hand, it had cash of €305.9m and €291.0m worth of receivables due within a year. So its liabilities total €328.9m more than the combination of its cash and short-term receivables.

Since publicly traded SCR-Sibelco shares are worth a total of €2.26b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, SCR-Sibelco boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SCR-Sibelco grew its EBIT by 135% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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. Over the last three years, SCR-Sibelco actually produced more free cash flow than EBIT. 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 €215.9m. And it impressed us with free cash flow of €90m, being 191% of its EBIT. So is SCR-Sibelco's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with SCR-Sibelco , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.