Does Safran (EPA:SAF) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Safran SA (EPA:SAF) does carry debt. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Safran

How Much Debt Does Safran Carry?

The chart below, which you can click on for greater detail, shows that Safran had €6.35b in debt in June 2022; about the same as the year before. But it also has €6.74b in cash to offset that, meaning it has €393.0m net cash.

How Strong Is Safran's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Safran had liabilities of €26.6b due within 12 months and liabilities of €8.89b due beyond that. Offsetting these obligations, it had cash of €6.74b as well as receivables valued at €9.09b due within 12 months. So it has liabilities totalling €19.7b more than its cash and near-term receivables, combined.

Safran has a very large market capitalization of €43.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Safran boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Safran grew its EBIT by 110% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Safran'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. Safran may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Safran generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Safran does have more liabilities than liquid assets, it also has net cash of €393.0m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in €2.6b. So we don't think Safran's use of debt is risky. Even though Safran lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.