Does Saint Jean Groupe Société anonyme (EPA:SABE) Have A Healthy Balance Sheet?

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.' 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 can see that Saint Jean Groupe Société anonyme (EPA:SABE) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Saint Jean Groupe Société anonyme

What Is Saint Jean Groupe Société anonyme's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Saint Jean Groupe Société anonyme had €33.6m of debt, an increase on €27.6m, over one year. However, it does have €45.3m in cash offsetting this, leading to net cash of €11.8m.

A Look At Saint Jean Groupe Société anonyme's Liabilities

The latest balance sheet data shows that Saint Jean Groupe Société anonyme had liabilities of €25.1m due within a year, and liabilities of €32.7m falling due after that. On the other hand, it had cash of €45.3m and €11.8m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Saint Jean Groupe Société anonyme'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 €89.3m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Saint Jean Groupe Société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Saint Jean Groupe Société anonyme's EBIT fell a jaw-dropping 22% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Saint Jean Groupe Société anonyme's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Saint Jean Groupe Société anonyme 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, Saint Jean Groupe Société anonyme burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Saint Jean Groupe Société anonyme has €11.8m in net cash. Despite the cash, we do find Saint Jean Groupe Société anonyme's EBIT growth rate concerning, so we're not particularly comfortable with the stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Saint Jean Groupe Société anonyme you should be aware of, and 2 of them shouldn't be ignored.

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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