These 4 Measures Indicate That Société BIC (EPA:BB) Is Using Debt Safely

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. We can see that Société BIC SA (EPA:BB) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Société BIC

How Much Debt Does Société BIC Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Société BIC had €90.6m of debt, an increase on €83.3m, over one year. However, it does have €320.5m in cash offsetting this, leading to net cash of €229.9m.

How Strong Is Société BIC's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Société BIC had liabilities of €751.2m due within 12 months and liabilities of €185.7m due beyond that. Offsetting this, it had €320.5m in cash and €577.2m in receivables that were due within 12 months. So it has liabilities totalling €39.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that Société BIC's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €2.64b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Société BIC boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Société BIC has increased its EBIT by 6.1% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Société BIC'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Société BIC 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. During the last three years, Société BIC produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Société BIC's liabilities, but we can be reassured by the fact it has has net cash of €229.9m. And it impressed us with free cash flow of €124m, being 78% of its EBIT. So is Société BIC's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Société BIC you should know about.

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.