Is Signaux Girod (EPA:GIRO) 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 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 note that Signaux Girod S.A. (EPA:GIRO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Signaux Girod

How Much Debt Does Signaux Girod Carry?

As you can see below, at the end of March 2021, Signaux Girod had €10.6m of debt, up from €9.95m a year ago. Click the image for more detail. However, it does have €11.0m in cash offsetting this, leading to net cash of €395.0k.

How Healthy Is Signaux Girod's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Signaux Girod had liabilities of €20.7m due within 12 months and liabilities of €14.2m due beyond that. On the other hand, it had cash of €11.0m and €19.4m worth of receivables due within a year. So its liabilities total €4.50m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Signaux Girod is worth €16.2m, and thus could probably raise enough capital to shore up 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Signaux Girod made a loss at the EBIT level, and saw its revenue drop to €88m, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Signaux Girod?

Although Signaux Girod had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €2.0m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Signaux Girod (at least 1 which can't be ignored) , 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.

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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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