Does SimCorp (CPH:SIM) Have A 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 SimCorp A/S (CPH:SIM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for SimCorp

How Much Debt Does SimCorp Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 SimCorp had €6.72m of debt, an increase on none, over one year. However, its balance sheet shows it holds €40.5m in cash, so it actually has €33.8m net cash.

How Healthy Is SimCorp's Balance Sheet?

The latest balance sheet data shows that SimCorp had liabilities of €143.6m due within a year, and liabilities of €85.2m falling due after that. Offsetting these obligations, it had cash of €40.5m as well as receivables valued at €410.8m due within 12 months. So it actually has €222.5m more liquid assets than total liabilities.

This surplus suggests that SimCorp has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SimCorp boasts net cash, so it's fair to say it does not have a heavy debt load!

While SimCorp doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SimCorp'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SimCorp 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. During the last three years, SimCorp produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SimCorp has net cash of €33.8m, as well as more liquid assets than liabilities. So we don't think SimCorp's use of debt is risky. 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. For example, we've discovered 2 warning signs for SimCorp that you should be aware of before investing here.

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. 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.