SII (EPA:SII) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, SII S.A. (EPA:SII) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SII

How Much Debt Does SII Carry?

As you can see below, SII had €30.7m of debt at September 2022, down from €34.9m a year prior. However, it does have €152.2m in cash offsetting this, leading to net cash of €121.5m.

How Healthy Is SII's Balance Sheet?

We can see from the most recent balance sheet that SII had liabilities of €274.1m falling due within a year, and liabilities of €55.0m due beyond that. Offsetting this, it had €152.2m in cash and €268.8m in receivables that were due within 12 months. So it actually has €91.9m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that SII has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. 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 SII'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. SII 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. Over the last three years, SII recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case SII has €121.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €60m, being 96% of its EBIT. So we don't think SII's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in SII, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.