GROUPE SFPI (EPA:SFPI) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that GROUPE SFPI SA (EPA:SFPI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for GROUPE SFPI

What Is GROUPE SFPI's Debt?

As you can see below, at the end of December 2020, GROUPE SFPI had €97.9m of debt, up from €89.8m a year ago. Click the image for more detail. But it also has €162.6m in cash to offset that, meaning it has €64.7m net cash.

How Strong Is GROUPE SFPI's Balance Sheet?

We can see from the most recent balance sheet that GROUPE SFPI had liabilities of €156.3m falling due within a year, and liabilities of €155.0m due beyond that. Offsetting these obligations, it had cash of €162.6m as well as receivables valued at €113.5m due within 12 months. So its liabilities total €35.2m more than the combination of its cash and short-term receivables.

Of course, GROUPE SFPI has a market capitalization of €246.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, GROUPE SFPI also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that GROUPE SFPI saw its EBIT decline by 6.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine GROUPE SFPI'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. GROUPE SFPI may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, GROUPE SFPI recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although GROUPE SFPI's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €64.7m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in €40m. So we don't think GROUPE SFPI's use of debt is risky. 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. For instance, we've identified 3 warning signs for GROUPE SFPI that you should be aware of.

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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