Is Saint Jean Groupe Société anonyme (EPA:SABE) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Saint Jean Groupe Société anonyme (EPA:SABE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that SABE is potentially overvalued!

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 June 2022 Saint Jean Groupe Société anonyme had €52.9m of debt, an increase on €41.4m, over one year. On the flip side, it has €43.1m in cash leading to net debt of about €9.75m.

How Strong Is Saint Jean Groupe Société anonyme's Balance Sheet?

We can see from the most recent balance sheet that Saint Jean Groupe Société anonyme had liabilities of €30.0m falling due within a year, and liabilities of €50.2m due beyond that. Offsetting these obligations, it had cash of €43.1m as well as receivables valued at €10.4m due within 12 months. So its liabilities total €26.7m more than the combination of its cash and short-term receivables.

Saint Jean Groupe Société anonyme has a market capitalization of €65.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Saint Jean Groupe Société anonyme's net debt is only 1.1 times its EBITDA. And its EBIT covers its interest expense a whopping 22.9 times over. So we're pretty relaxed about its super-conservative use of debt. Better yet, Saint Jean Groupe Société anonyme grew its EBIT by 248% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Saint Jean Groupe Société anonyme'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Saint Jean Groupe Société anonyme saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Saint Jean Groupe Société anonyme's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Saint Jean Groupe Société anonyme is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Saint Jean Groupe Société anonyme (3 can't be ignored!) 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.