These 4 Measures Indicate That Compagnie de Saint-Gobain (EPA:SGO) Is Using Debt Reasonably Well

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 can see that Compagnie de Saint-Gobain S.A. (EPA:SGO) does use debt in its business. But is this debt a concern to shareholders?

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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Compagnie de Saint-Gobain

How Much Debt Does Compagnie de Saint-Gobain Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Compagnie de Saint-Gobain had €13.0b of debt, an increase on €11.4b, over one year. On the flip side, it has €8.60b in cash leading to net debt of about €4.42b.

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

Zooming in on the latest balance sheet data, we can see that Compagnie de Saint-Gobain had liabilities of €16.6b due within 12 months and liabilities of €17.0b due beyond that. Offsetting these obligations, it had cash of €8.60b as well as receivables valued at €6.58b due within 12 months. So it has liabilities totalling €18.4b more than its cash and near-term receivables, combined.

Compagnie de Saint-Gobain has a very large market capitalization of €39.9b, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Compagnie de Saint-Gobain has a low net debt to EBITDA ratio of only 0.68. And its EBIT covers its interest expense a whopping 23.6 times over. So we're pretty relaxed about its super-conservative use of debt. Compagnie de Saint-Gobain's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Compagnie de Saint-Gobain can strengthen its balance sheet over time. 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Compagnie de Saint-Gobain produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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, on a more sombre note, we are a little concerned by its level of total liabilities. All these things considered, it appears that Compagnie de Saint-Gobain can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. We've identified 1 warning sign with Compagnie de Saint-Gobain , and understanding them should be part of your investment process.

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.