Is Somfy (EPA:SO) A Risky Investment?

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.' 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. Importantly, Somfy SA (EPA:SO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Somfy

What Is Somfy's Net Debt?

As you can see below, at the end of December 2021, Somfy had €41.1m of debt, up from €20.6m a year ago. Click the image for more detail. But on the other hand it also has €737.0m in cash, leading to a €695.9m net cash position.

A Look At Somfy's Liabilities

According to the last reported balance sheet, Somfy had liabilities of €303.0m due within 12 months, and liabilities of €127.6m due beyond 12 months. On the other hand, it had cash of €737.0m and €169.9m worth of receivables due within a year. So it actually has €476.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Somfy could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Somfy has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Somfy grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Somfy can strengthen its balance sheet over time. 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. Somfy 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. Over the last three years, Somfy recorded free cash flow worth a fulsome 93% 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 we empathize with investors who find debt concerning, you should keep in mind that Somfy has net cash of €695.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €251m, being 93% 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.