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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that SFC Energy AG (ETR:F3C) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SFC Energy

What Is SFC Energy's Net Debt?

As you can see below, at the end of March 2023, SFC Energy had €5.11m of debt, up from €3.06m a year ago. Click the image for more detail. However, it does have €59.8m in cash offsetting this, leading to net cash of €54.7m.

How Strong Is SFC Energy's Balance Sheet?

The latest balance sheet data shows that SFC Energy had liabilities of €28.9m due within a year, and liabilities of €16.7m falling due after that. On the other hand, it had cash of €59.8m and €24.9m worth of receivables due within a year. So it actually has €39.2m more liquid assets than total liabilities.

This short term liquidity is a sign that SFC Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SFC Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that SFC Energy grew its EBIT by 5,934% over twelve months. That boost will make it even easier to pay down debt 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 SFC Energy'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 three years, 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 €54.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 5,934% over the last year. So we don't have any problem with SFC Energy's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SFC Energy (of which 1 doesn't sit too well with us!) you should know about.

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.

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.