We Think BASSAC Société anonyme (EPA:BASS) Can Stay On Top Of Its Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that BASSAC Société anonyme (EPA:BASS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for BASSAC Société anonyme

What Is BASSAC Société anonyme's Debt?

As you can see below, BASSAC Société anonyme had €239.4m of debt at June 2021, down from €310.4m a year prior. However, it does have €268.9m in cash offsetting this, leading to net cash of €29.5m.

A Look At BASSAC Société anonyme's Liabilities

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 €268.9m in cash and €128.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €276.5m.

While this might seem like a lot, it is not so bad since BASSAC Société anonyme has a market capitalization of €1.15b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, BASSAC Société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that BASSAC Société anonyme has increased its EBIT by 2.3% over twelve months, which should ease any concerns about debt repayment. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While BASSAC Société anonyme 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. During the last three years, BASSAC Société anonyme generated free cash flow amounting to a very robust 87% 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 €29.5m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in €195m. So we don't think BASSAC Société anonyme's use of debt is risky. 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. We've identified 1 warning sign with BASSAC Société anonyme , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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