Is BASSAC Société anonyme (EPA:BASS) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that BASSAC Société anonyme (EPA:BASS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BASSAC Société anonyme

What Is BASSAC Société anonyme's Net Debt?

As you can see below, BASSAC Société anonyme had €231.1m of debt at June 2021, down from €310.4m a year prior. However, its balance sheet shows it holds €267.3m in cash, so it actually has €36.2m net cash.

How Strong Is BASSAC Société anonyme's Balance Sheet?

We can see from the most recent balance sheet that BASSAC Société anonyme had liabilities of €491.6m falling due within a year, and liabilities of €181.7m due beyond that. Offsetting this, it had €267.3m in cash and €148.7m in receivables that were due within 12 months. So it has liabilities totalling €257.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since BASSAC Société anonyme has a market capitalization of €1.09b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, BASSAC Société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that BASSAC Société anonyme grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BASSAC Société anonyme can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. BASSAC 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, BASSAC Société anonyme generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While BASSAC Société anonyme does have more liabilities than liquid assets, it also has net cash of €36.2m. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in €195m. So is BASSAC Société anonyme's debt a risk? It doesn't seem so to us. Given BASSAC Société anonyme has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.