David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Soitec SA (EPA:SOI) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Soitec
How Much Debt Does Soitec Carry?
The chart below, which you can click on for greater detail, shows that Soitec had €579.7m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds €712.7m in cash, so it actually has €133.0m net cash.
How Strong Is Soitec's Balance Sheet?
According to the last reported balance sheet, Soitec had liabilities of €449.1m due within 12 months, and liabilities of €748.5m due beyond 12 months. On the other hand, it had cash of €712.7m and €520.5m worth of receivables due within a year. So it can boast €35.7m 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 €3.89b company is short on cash, but still worth keeping an eye on the 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.
In fact Soitec's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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. In the last three years, Soitec created free cash flow amounting to 3.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Soitec has net cash of €133.0m, as well as more liquid assets than liabilities. So we don't have any problem with Soitec's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Soitec's earnings per share history for free.
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.
About ENXTPA:SOI
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