Does SFC Energy (ETR:F3C) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies SFC Energy AG (ETR:F3C) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SFC Energy

How Much Debt Does SFC Energy Carry?

The image below, which you can click on for greater detail, shows that SFC Energy had debt of €2.73m at the end of December 2021, a reduction from €4.55m over a year. But on the other hand it also has €24.6m in cash, leading to a €21.9m net cash position.

A Look At SFC Energy's Liabilities

According to the last reported balance sheet, SFC Energy had liabilities of €21.0m due within 12 months, and liabilities of €16.3m due beyond 12 months. Offsetting these obligations, it had cash of €24.6m as well as receivables valued at €18.6m due within 12 months. So it can boast €5.90m more liquid assets than total liabilities.

This state of affairs indicates that SFC Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €329.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, SFC Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, SFC Energy made a loss at the EBIT level, last year, but improved that to positive EBIT of €2.0m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SFC Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SFC Energy 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. During the last year, SFC Energy burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that SFC Energy has net cash of €21.9m, as well as more liquid assets than liabilities. So we don't have any problem with SFC Energy's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with SFC Energy , and understanding them should be part of your investment process.

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.