Here's Why GROUPE SFPI (EPA:SFPI) Has A Meaningful Debt Burden

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. As with many other companies GROUPE SFPI SA (EPA:SFPI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GROUPE SFPI

What Is GROUPE SFPI's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 GROUPE SFPI had debt of €109.5m, up from €85.6m in one year. But on the other hand it also has €120.9m in cash, leading to a €11.4m net cash position.

A Look At GROUPE SFPI's Liabilities

We can see from the most recent balance sheet that GROUPE SFPI had liabilities of €227.6m falling due within a year, and liabilities of €155.7m due beyond that. Offsetting this, it had €120.9m in cash and €124.6m in receivables that were due within 12 months. So its liabilities total €137.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €159.3m, so it does suggest shareholders should keep an eye on GROUPE SFPI's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

On the other hand, GROUPE SFPI's EBIT dived 20%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GROUPE SFPI can strengthen its balance sheet over time. 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. 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. During the last three years, GROUPE SFPI produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While GROUPE SFPI does have more liabilities than liquid assets, it also has net cash of €11.4m. So although we see some areas for improvement, we're not too worried about GROUPE SFPI's balance sheet. 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 example - GROUPE SFPI has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.