Is Compagnie de Saint-Gobain (EPA:SGO) A Risky Investment?

By
Simply Wall St
Published
December 25, 2021
ENXTPA:SGO
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Compagnie de Saint-Gobain S.A. (EPA:SGO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Compagnie de Saint-Gobain

How Much Debt Does Compagnie de Saint-Gobain Carry?

As you can see below, Compagnie de Saint-Gobain had €11.1b of debt at June 2021, down from €13.7b a year prior. However, it also had €6.60b in cash, and so its net debt is €4.54b.

debt-equity-history-analysis
ENXTPA:SGO Debt to Equity History December 25th 2021

How Healthy Is Compagnie de Saint-Gobain's Balance Sheet?

We can see from the most recent balance sheet that Compagnie de Saint-Gobain had liabilities of €14.3b falling due within a year, and liabilities of €15.7b due beyond that. Offsetting this, it had €6.60b in cash and €7.21b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €16.2b.

Compagnie de Saint-Gobain has a very large market capitalization of €32.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Compagnie de Saint-Gobain has a low net debt to EBITDA ratio of only 0.81. And its EBIT covers its interest expense a whopping 12.4 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that Compagnie de Saint-Gobain has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. 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 Compagnie de Saint-Gobain'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 company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Compagnie de Saint-Gobain recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Compagnie de Saint-Gobain's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. Looking at the bigger picture, we think Compagnie de Saint-Gobain's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Compagnie de Saint-Gobain you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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