We Think Somfy (EPA:SO) Can Manage Its Debt With Ease

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. We note that Somfy SA (EPA:SO) does have debt on its balance sheet. 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. 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. 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 Somfy

How Much Debt Does Somfy Carry?

As you can see below, at the end of June 2020, Somfy had €66.0m of debt, up from €32.6m a year ago. Click the image for more detail. But it also has €443.4m in cash to offset that, meaning it has €377.5m net cash.

A Look At Somfy's Liabilities

We can see from the most recent balance sheet that Somfy had liabilities of €276.3m falling due within a year, and liabilities of €107.6m due beyond that. On the other hand, it had cash of €443.4m and €216.0m worth of receivables due within a year. So it actually has €275.6m 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. Succinctly put, Somfy boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Somfy grew its EBIT by 7.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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'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 85% 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 €377.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €206m, being 85% of its EBIT. So we don't think Somfy's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Somfy's earnings per share history for free.

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. 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.
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