Does Soitec (EPA:SOI) Have A Healthy Balance Sheet?

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. As with many other companies Soitec S.A. (EPA:SOI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Soitec

What Is Soitec's Net Debt?

As you can see below, Soitec had €586.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has €732.0m in cash to offset that, meaning it has €146.0m net cash.

How Strong Is Soitec's Balance Sheet?

The latest balance sheet data shows that Soitec had liabilities of €346.0m due within a year, and liabilities of €596.0m falling due after that. Offsetting this, it had €732.0m in cash and €280.0m in receivables that were due within 12 months. So it actually has €70.0m more liquid assets than total liabilities.

Having regard to Soitec's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €5.53b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Soitec boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Soitec grew its EBIT by 117% over twelve months. 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 future earnings, more than anything, that will determine Soitec'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Soitec 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. Looking at the most recent three years, Soitec recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Soitec has net cash of €146.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 117% year-on-year EBIT growth. So we don't think Soitec's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Soitec (of which 1 doesn't sit too well with us!) you should know about.

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.