Does SLM Solutions Group (ETR:AM3D) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that SLM Solutions Group AG (ETR:AM3D) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for SLM Solutions Group

What Is SLM Solutions Group's Net Debt?

As you can see below, at the end of September 2020, SLM Solutions Group had €77.4m of debt, up from €68.7m a year ago. Click the image for more detail. However, it does have €25.9m in cash offsetting this, leading to net debt of about €51.5m.

How Healthy Is SLM Solutions Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SLM Solutions Group had liabilities of €22.1m due within 12 months and liabilities of €87.1m due beyond that. Offsetting these obligations, it had cash of €25.9m as well as receivables valued at €19.8m due within 12 months. So it has liabilities totalling €63.5m more than its cash and near-term receivables, combined.

Given SLM Solutions Group has a market capitalization of €383.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SLM Solutions Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year SLM Solutions Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to €66m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months SLM Solutions Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €28m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €10m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with SLM Solutions Group .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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