These 4 Measures Indicate That Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN) does carry debt. But the real question is whether this debt is making the company risky.

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. 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.

View 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 €29.9m of debt at September 2024, down from €64.3m a year prior. But on the other hand it also has €318.6m in cash, leading to a €288.7m net cash position.

A Look At Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's Liabilities

According to the last reported balance sheet, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco had liabilities of €395.0m due within 12 months, and liabilities of €199.8m due beyond 12 months. Offsetting this, it had €318.6m in cash and €77.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €199.1m.

Of course, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has a market capitalization of €2.53b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

And we also note warmly that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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. 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. 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 three years. 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 €288.7m. And it impressed us with free cash flow of €75m, being 107% of its EBIT. So we don't think Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.