Is Soitec (EPA:SOI) A Risky Investment?

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. Importantly, Soitec S.A. (EPA:SOI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Soitec

What Is Soitec's Net Debt?

The chart below, which you can click on for greater detail, shows that Soitec had €575.8m in debt in September 2022; about the same as the year before. However, it does have €747.0m in cash offsetting this, leading to net cash of €171.2m.

A Look At Soitec's Liabilities

The latest balance sheet data shows that Soitec had liabilities of €377.2m due within a year, and liabilities of €614.3m falling due after that. Offsetting this, it had €747.0m in cash and €347.7m in receivables that were due within 12 months. So it actually has €103.1m more liquid assets than total liabilities.

This state of affairs indicates that Soitec's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €5.21b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Soitec has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Soitec grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 28% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Soitec has €171.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 78% year-on-year EBIT growth. So is Soitec's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Soitec, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.