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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Société BIC SA (EPA:BB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View 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 2023 Société BIC had €202.2m of debt, an increase on €90.6m, over one year. But on the other hand it also has €327.2m in cash, leading to a €125.0m net cash position.

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 €693.2m due within 12 months and liabilities of €200.8m due beyond that. Offsetting this, it had €327.2m in cash and €569.6m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

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 €2.31b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Société BIC has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Société BIC has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Société BIC can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Société BIC 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. During the last three years, Société BIC produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Société BIC has net cash of €125.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €184m, being 73% of its EBIT. So we don't have any problem with Société BIC's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Société BIC 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. 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.