We Think Streamwide (EPA:ALSTW) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Streamwide S.A. (EPA:ALSTW) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that ALSTW is potentially undervalued!

What Is Streamwide's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Streamwide had €3.12m of debt, an increase on €2.99m, over one year. But on the other hand it also has €9.54m in cash, leading to a €6.43m net cash position.

How Strong Is Streamwide's Balance Sheet?

The latest balance sheet data shows that Streamwide had liabilities of €12.5m due within a year, and liabilities of €8.53m falling due after that. Offsetting these obligations, it had cash of €9.54m as well as receivables valued at €12.7m due within 12 months. So it actually has €1.21m more liquid assets than total liabilities.

This surplus suggests that Streamwide has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Streamwide has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Streamwide saw its EBIT decline by 8.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Streamwide can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 last three years, Streamwide reported free cash flow worth 2.1% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Streamwide has €6.43m in net cash and a decent-looking balance sheet. So we are not troubled with Streamwide's debt use. 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. For instance, we've identified 2 warning signs for Streamwide (1 is a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.