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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco had €64.3m of debt in September 2023, down from €123.6m, one year before. However, its balance sheet shows it holds €468.5m in cash, so it actually has €404.3m net cash.

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

Zooming in on the latest balance sheet data, we can see that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco had liabilities of €379.2m due within 12 months and liabilities of €203.9m due beyond that. On the other hand, it had cash of €468.5m and €66.5m worth of receivables due within a year. So its liabilities total €48.0m more than the combination of its cash and short-term receivables.

Having regard to Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €2.49b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. While Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco 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. Over the last three years, 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's liabilities, but we can be reassured by the fact it has has net cash of €404.3m. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in €96m. So we don't think Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.