Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 SMCP S.A. (EPA:SMCP) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 SMCP
What Is SMCP's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 SMCP had €510.0m of debt, an increase on €439.8m, over one year. However, it also had €127.1m in cash, and so its net debt is €382.9m.
How Strong Is SMCP's Balance Sheet?
The latest balance sheet data shows that SMCP had liabilities of €339.2m due within a year, and liabilities of €977.8m falling due after that. Offsetting this, it had €127.1m in cash and €109.8m in receivables that were due within 12 months. So its liabilities total €1.08b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the €538.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, SMCP would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SMCP's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year SMCP had a loss before interest and tax, and actually shrunk its revenue by 23%, to €873m. To be frank that doesn't bode well.
Caveat Emptor
Not only did SMCP's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €2.2m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €102m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for SMCP that you should be aware of before investing here.
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. 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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About ENXTPA:SMCP
SMCP
Operates as a ready-to-wear and accessories retail company in France and internationally.
Good value with moderate growth potential.
