Is SES-imagotag Société Anonyme (EPA:SESL) A Risky Investment?

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. We note that SES-imagotag Société Anonyme (EPA:SESL) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SES-imagotag Société Anonyme

What Is SES-imagotag Société Anonyme's Debt?

As you can see below, at the end of June 2020, SES-imagotag Société Anonyme had €53.4m of debt, up from €44.8m a year ago. Click the image for more detail. However, it also had €27.2m in cash, and so its net debt is €26.2m.

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

Zooming in on the latest balance sheet data, we can see that SES-imagotag Société Anonyme had liabilities of €170.4m due within 12 months and liabilities of €69.7m due beyond that. Offsetting these obligations, it had cash of €27.2m as well as receivables valued at €114.8m due within 12 months. So its liabilities total €98.0m more than the combination of its cash and short-term receivables.

SES-imagotag Société Anonyme has a market capitalization of €401.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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.

Over 12 months, SES-imagotag Société Anonyme reported revenue of €245m, which is a gain of 7.2%, 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.

Caveat Emptor

Over the last twelve months SES-imagotag Société Anonyme produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €21m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €59m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for SES-imagotag Société Anonyme that you should be aware of.

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. 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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