Is SII (Société pour l'Informatique Industrielle) Société Anonyme (EPA:SII) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SII (Société pour l'Informatique Industrielle) Société Anonyme (EPA:SII) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SII (Société pour l'Informatique Industrielle) Société Anonyme

What Is SII (Société pour l'Informatique Industrielle) Société Anonyme's Debt?

As you can see below, SII (Société pour l'Informatique Industrielle) Société Anonyme had €31.9m of debt at September 2020, down from €41.7m a year prior. However, it does have €113.4m in cash offsetting this, leading to net cash of €81.5m.

A Look At SII (Société pour l'Informatique Industrielle) Société Anonyme's Liabilities

The latest balance sheet data shows that SII (Société pour l'Informatique Industrielle) Société Anonyme had liabilities of €191.8m due within a year, and liabilities of €70.7m falling due after that. Offsetting this, it had €113.4m in cash and €188.0m in receivables that were due within 12 months. So it actually has €38.9m more liquid assets than total liabilities.

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

It is just as well that SII (Société pour l'Informatique Industrielle) Société Anonyme's load is not too heavy, because its EBIT was down 37% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 SII (Société pour l'Informatique Industrielle) Société Anonyme 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SII (Société pour l'Informatique Industrielle) Société Anonyme 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. Happily for any shareholders, SII (Société pour l'Informatique Industrielle) Société Anonyme actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case SII (Société pour l'Informatique Industrielle) Société Anonyme has €81.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in €69m. So we are not troubled with SII (Société pour l'Informatique Industrielle) Société Anonyme'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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for SII (Société pour l'Informatique Industrielle) Société Anonyme you should know about.

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. 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.
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