Is SES-imagotag Société Anonyme (EPA:SESL) Using Too Much Debt?

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.' 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 can see that SES-imagotag Société Anonyme (EPA:SESL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See 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 2021, SES-imagotag Société Anonyme had €81.6m of debt, up from €53.4m a year ago. Click the image for more detail. However, because it has a cash reserve of €80.5m, its net debt is less, at about €1.07m.

How Strong 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 €216.1m falling due within a year, and liabilities of €99.0m due beyond that. Offsetting this, it had €80.5m in cash and €122.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €112.4m.

Given SES-imagotag Société Anonyme has a market capitalization of €1.08b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, SES-imagotag Société Anonyme has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

SES-imagotag Société Anonyme has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.079 and EBIT of 11.0 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. Although SES-imagotag Société Anonyme made a loss at the EBIT level, last year, it was also good to see that it generated €7.4m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, SES-imagotag Société Anonyme actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, SES-imagotag Société Anonyme's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Looking at the bigger picture, we think SES-imagotag Société Anonyme's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. We've identified 1 warning sign with SES-imagotag Société Anonyme , 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.

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.

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