Sogeclair (EPA:SOG) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sogeclair SA (EPA:SOG) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sogeclair

How Much Debt Does Sogeclair Carry?

As you can see below, at the end of December 2020, Sogeclair had €43.2m of debt, up from €31.8m a year ago. Click the image for more detail. But on the other hand it also has €45.9m in cash, leading to a €2.71m net cash position.

A Look At Sogeclair's Liabilities

According to the last reported balance sheet, Sogeclair had liabilities of €91.1m due within 12 months, and liabilities of €25.8m due beyond 12 months. On the other hand, it had cash of €45.9m and €64.0m worth of receivables due within a year. So its liabilities total €7.06m more than the combination of its cash and short-term receivables.

Of course, Sogeclair has a market capitalization of €57.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sogeclair boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Sogeclair 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.

In the last year Sogeclair had a loss before interest and tax, and actually shrunk its revenue by 33%, to €123m. To be frank that doesn't bode well.

So How Risky Is Sogeclair?

While Sogeclair lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €22m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For instance, we've identified 3 warning signs for Sogeclair that you should be aware of.

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. 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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