Is Signaux Girod (EPA:ALGIR) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Signaux Girod S.A. (EPA:ALGIR) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Signaux Girod

How Much Debt Does Signaux Girod Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Signaux Girod had debt of €13.9m, up from €12.3m in one year. But it also has €14.0m in cash to offset that, meaning it has €130.0k net cash.

A Look At Signaux Girod's Liabilities

Zooming in on the latest balance sheet data, we can see that Signaux Girod had liabilities of €23.2m due within 12 months and liabilities of €17.5m due beyond that. On the other hand, it had cash of €14.0m and €22.6m worth of receivables due within a year. So its liabilities total €4.01m more than the combination of its cash and short-term receivables.

Signaux Girod has a market capitalization of €16.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Signaux Girod also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Signaux Girod grew its EBIT by 174% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Signaux Girod will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Signaux Girod 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. In the last two years, Signaux Girod basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

Although Signaux Girod's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €130.0k. And it impressed us with its EBIT growth of 174% over the last year. So we don't have any problem with Signaux Girod's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Signaux Girod you should know about.

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.