Does SRP Groupe (EPA:SRP) Have A Healthy Balance Sheet?

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 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. As with many other companies SRP Groupe S.A. (EPA:SRP) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SRP Groupe

What Is SRP Groupe's Net Debt?

The image below, which you can click on for greater detail, shows that SRP Groupe had debt of €37.0m at the end of June 2024, a reduction from €42.3m over a year. However, it does have €50.9m in cash offsetting this, leading to net cash of €13.9m.

A Look At SRP Groupe's Liabilities

The latest balance sheet data shows that SRP Groupe had liabilities of €202.3m due within a year, and liabilities of €36.0m falling due after that. Offsetting this, it had €50.9m in cash and €26.7m in receivables that were due within 12 months. So it has liabilities totalling €160.7m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €131.6m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. SRP Groupe boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

We also note that SRP Groupe improved its EBIT from a last year's loss to a positive €379k. 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 SRP Groupe 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SRP Groupe 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 year, SRP Groupe burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While SRP Groupe does have more liabilities than liquid assets, it also has net cash of €13.9m. Despite the cash, we do find SRP Groupe's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. Even though SRP Groupe lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.