Here's Why SFC Energy (ETR:F3C) Can Manage Its Debt Responsibly

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. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

The chart below, which you can click on for greater detail, shows that SFC Energy had €4.02m in debt in June 2021; about the same as the year before. However, its balance sheet shows it holds €29.0m in cash, so it actually has €24.9m net cash.

How Strong Is SFC Energy's Balance Sheet?

The latest balance sheet data shows that SFC Energy had liabilities of €24.0m due within a year, and liabilities of €13.0m falling due after that. On the other hand, it had cash of €29.0m and €15.8m worth of receivables due within a year. So it actually has €7.71m 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 €422.5m 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's EBIT launched higher than Elon Musk, gaining a whopping 1,299% on last year. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SFC Energy 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. Over the last three years, SFC Energy saw substantial negative free cash flow, in total. 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 €24.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 1,299% over the last year. So we are not troubled with SFC Energy's debt use. 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 example - SFC Energy has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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