Is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco

How Much Debt Does Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco Carry?

The chart below, which you can click on for greater detail, shows that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco had €283.2m in debt in September 2021; about the same as the year before. However, it does have €213.6m in cash offsetting this, leading to net debt of about €69.6m.

How Healthy Is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's Balance Sheet?

We can see from the most recent balance sheet that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco had liabilities of €411.7m falling due within a year, and liabilities of €327.6m due beyond that. On the other hand, it had cash of €213.6m and €50.5m worth of receivables due within a year. So its liabilities total €475.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco is worth €1.67b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has a very low debt to EBITDA ratio of 0.78 so it is strange to see weak interest coverage, with last year's EBIT being only 2.5 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Notably, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco made a loss at the EBIT level, last year, but improved that to positive EBIT of €15m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

When it comes to the balance sheet, the standout positive for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco was the fact that it seems able to convert EBIT to free cash flow confidently. But the other factors we noted above weren't so encouraging. To be specific, it seems about as good at covering its interest expense with its EBIT as wet socks are at keeping your feet warm. When we consider all the elements mentioned above, it seems to us that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco that you should be aware of before investing here.

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.