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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

What Is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's Net Debt?

As you can see below, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco had €202.4m of debt at March 2022, down from €253.4m a year prior. But it also has €208.4m in cash to offset that, meaning it has €6.03m net cash.

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

According to the last reported balance sheet, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco had liabilities of €359.6m due within 12 months, and liabilities of €277.8m due beyond 12 months. Offsetting this, it had €208.4m in cash and €36.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €392.4m.

Given Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has a market capitalization of €2.17b, it's hard to believe these liabilities pose much threat. 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, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco turned things around in the last 12 months, delivering and EBIT of €37m. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco 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 year, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco does have more liabilities than liquid assets, it also has net cash of €6.03m. The cherry on top was that in converted 207% of that EBIT to free cash flow, bringing in €76m. So we don't have any problem with Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco, you may well want to click here to check an interactive graph of its earnings per share history.

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.