Streamwide (EPA:ALSTW) Could Easily Take On More Debt

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

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Streamwide

What Is Streamwide's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Streamwide had debt of €3.17m, up from €1.01m in one year. But on the other hand it also has €9.54m in cash, leading to a €6.37m net cash position.

A Look At Streamwide's Liabilities

Zooming in on the latest balance sheet data, we can see that Streamwide had liabilities of €11.8m due within 12 months and liabilities of €3.30m due beyond that. On the other hand, it had cash of €9.54m and €8.46m worth of receivables due within a year. So it can boast €2.91m more liquid assets than total liabilities.

This short term liquidity is a sign that Streamwide could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Streamwide boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Streamwide grew its EBIT by 230% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Streamwide'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Streamwide 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. Over the most recent two years, Streamwide recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Streamwide has €6.37m in net cash and a decent-looking balance sheet. And we liked the look of last year's 230% year-on-year EBIT growth. So we don't think Streamwide's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Streamwide you should know about.

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.

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