Does SES-imagotag Société Anonyme (EPA:SESL) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that SES-imagotag Société Anonyme (EPA:SESL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for SES-imagotag Société Anonyme

How Much Debt Does SES-imagotag Société Anonyme Carry?

The chart below, which you can click on for greater detail, shows that SES-imagotag Société Anonyme had €81.5m in debt in December 2021; about the same as the year before. However, it does have €93.0m in cash offsetting this, leading to net cash of €11.5m.

How Healthy Is SES-imagotag Société Anonyme's Balance Sheet?

We can see from the most recent balance sheet that SES-imagotag Société Anonyme had liabilities of €262.4m falling due within a year, and liabilities of €100.4m due beyond that. On the other hand, it had cash of €93.0m and €133.7m worth of receivables due within a year. So it has liabilities totalling €136.1m more than its cash and near-term receivables, combined.

Of course, SES-imagotag Société Anonyme has a market capitalization of €1.17b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, SES-imagotag Société Anonyme also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that SES-imagotag Société Anonyme improved its EBIT from a last year's loss to a positive €5.2m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SES-imagotag Société Anonyme'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SES-imagotag 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. In the last year, SES-imagotag Société Anonyme's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although SES-imagotag Société Anonyme's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €11.5m. So we don't have any problem with SES-imagotag Société Anonyme's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with SES-imagotag Société Anonyme .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.