These 4 Measures Indicate That SFC Energy (ETR:F3C) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SFC Energy

What Is SFC Energy's Net Debt?

The image below, which you can click on for greater detail, shows that SFC Energy had debt of €1.89m at the end of September 2021, a reduction from €3.61m over a year. But it also has €25.1m in cash to offset that, meaning it has €23.3m net cash.

How Strong Is SFC Energy's Balance Sheet?

According to the last reported balance sheet, SFC Energy had liabilities of €18.4m due within 12 months, and liabilities of €16.2m due beyond 12 months. On the other hand, it had cash of €25.1m and €16.4m worth of receivables due within a year. So it can boast €7.03m 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 €393.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that SFC Energy has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, SFC Energy's EBIT launched higher than Elon Musk, gaining a whopping 1,395% on last year. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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 €23.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 1,395% year-on-year EBIT growth. So we don't have any problem with SFC Energy's use of debt. 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. We've identified 1 warning sign with SFC Energy , and understanding them should be part of your investment process.

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.