SNP Schneider-Neureither & Partner (ETR:SHF) Has A Pretty Healthy Balance Sheet

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. We can see that SNP Schneider-Neureither & Partner SE (ETR:SHF) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SNP Schneider-Neureither & Partner

What Is SNP Schneider-Neureither & Partner's Debt?

As you can see below, at the end of September 2020, SNP Schneider-Neureither & Partner had €50.5m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has €30.2m in cash leading to net debt of about €20.3m.

How Healthy Is SNP Schneider-Neureither & Partner's Balance Sheet?

According to the last reported balance sheet, SNP Schneider-Neureither & Partner had liabilities of €45.7m due within 12 months, and liabilities of €64.0m due beyond 12 months. Offsetting this, it had €30.2m in cash and €44.2m in receivables that were due within 12 months. So it has liabilities totalling €35.3m more than its cash and near-term receivables, combined.

Given SNP Schneider-Neureither & Partner has a market capitalization of €448.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

SNP Schneider-Neureither & Partner has net debt worth 1.7 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.2 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Notably, SNP Schneider-Neureither & Partner made a loss at the EBIT level, last year, but improved that to positive EBIT of €8.2m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SNP Schneider-Neureither & Partner 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 company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Looking at the most recent year, SNP Schneider-Neureither & Partner recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Based on what we've seen SNP Schneider-Neureither & Partner is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that it has an adequate capacity to handle its total liabilities. Looking at all this data makes us feel a little cautious about SNP Schneider-Neureither & Partner's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. Be aware that SNP Schneider-Neureither & Partner is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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. 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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