Safran (EPA:SAF) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Safran SA (EPA:SAF) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Safran

What Is Safran's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Safran had €6.02b of debt in December 2023, down from €6.39b, one year before. However, its balance sheet shows it holds €6.68b in cash, so it actually has €657.0m net cash.

How Healthy Is Safran's Balance Sheet?

The latest balance sheet data shows that Safran had liabilities of €30.8b due within a year, and liabilities of €7.59b falling due after that. Offsetting these obligations, it had cash of €6.68b as well as receivables valued at €10.4b due within 12 months. So its liabilities total €21.3b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Safran has a huge market capitalization of €86.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Safran also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Safran grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Safran actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Safran does have more liabilities than liquid assets, it also has net cash of €657.0m. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in €2.9b. So is Safran's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Safran, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.