Soitec (EPA:SOI) Has A Pretty Healthy Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Soitec SA (EPA:SOI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See 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 €557.2m in debt in September 2023; about the same as the year before. But it also has €669.4m in cash to offset that, meaning it has €112.3m net cash.

A Look At Soitec's Liabilities

Zooming in on the latest balance sheet data, we can see that Soitec had liabilities of €351.8m due within 12 months and liabilities of €683.8m due beyond that. Offsetting this, it had €669.4m in cash and €321.8m in receivables that were due within 12 months. So its liabilities total €44.4m more than the combination of its cash and short-term receivables.

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 it's very unlikely that the €5.77b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Soitec also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Soitec grew its EBIT by 6.3% in the last year, making that debt load look even more manageable. 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'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. Soitec 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. Considering the last three years, Soitec actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Soitec's liabilities, but we can be reassured by the fact it has has net cash of €112.3m. On top of that, it increased its EBIT by 6.3% in the last twelve months. So we are not troubled with Soitec's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Soitec .

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.