Société Industrielle et Financière de l'Artois Société anonyme (EPA:ARTO) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Société Industrielle et Financière de l'Artois Société anonyme (EPA:ARTO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that ARTO is potentially overvalued!

What Is Société Industrielle et Financière de l'Artois Société anonyme's Net Debt?

As you can see below, at the end of June 2022, Société Industrielle et Financière de l'Artois Société anonyme had €47.2m of debt, up from €33.8m a year ago. Click the image for more detail. But it also has €699.1m in cash to offset that, meaning it has €651.9m net cash.

How Healthy Is Société Industrielle et Financière de l'Artois Société anonyme's Balance Sheet?

The latest balance sheet data shows that Société Industrielle et Financière de l'Artois Société anonyme had liabilities of €101.8m due within a year, and liabilities of €6.75m falling due after that. Offsetting these obligations, it had cash of €699.1m as well as receivables valued at €37.4m due within 12 months. So it can boast €628.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Société Industrielle et Financière de l'Artois Société anonyme's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Société Industrielle et Financière de l'Artois Société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Société Industrielle et Financière de l'Artois Société anonyme will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Société Industrielle et Financière de l'Artois Société anonyme reported revenue of €136m, which is a gain of 9.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Société Industrielle et Financière de l'Artois Société anonyme?

While Société Industrielle et Financière de l'Artois Société anonyme lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €19m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Société Industrielle et Financière de l'Artois Société anonyme (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.