Is Somfy (EPA:SO) A Risky Investment?

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, Somfy SA (EPA:SO) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Somfy

What Is Somfy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Somfy had €39.6m of debt in June 2021, down from €66.0m, one year before. However, its balance sheet shows it holds €609.4m in cash, so it actually has €569.8m net cash.

How Healthy Is Somfy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Somfy had liabilities of €289.4m due within 12 months and liabilities of €133.4m due beyond that. On the other hand, it had cash of €609.4m and €240.7m worth of receivables due within a year. So it actually has €427.3m more liquid assets than total liabilities.

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

On top of that, Somfy grew its EBIT by 93% 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 Somfy'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 Somfy 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. Over the last three years, Somfy recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Somfy has €569.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €316m, being 91% of its EBIT. So is Somfy'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 Somfy, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.