Is SFC Energy (ETR:F3C) A Risky Investment?

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.' 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 should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 €4.55m at the end of December 2020, a reduction from €6.52m over a year. However, it does have €31.5m in cash offsetting this, leading to net cash of €26.9m.

How Healthy Is SFC Energy's Balance Sheet?

The latest balance sheet data shows that SFC Energy had liabilities of €18.8m due within a year, and liabilities of €12.7m falling due after that. Offsetting this, it had €31.5m in cash and €13.7m in receivables that were due within 12 months. So it actually has €13.6m 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! 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.

Over 12 months, SFC Energy made a loss at the EBIT level, and saw its revenue drop to €53m, which is a fall of 9.1%. We would much prefer see growth.

So How Risky Is SFC Energy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months SFC Energy lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €4.9m and booked a €5.2m accounting loss. But the saving grace is the €26.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with SFC Energy , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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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