Is Société Marseillaise du Tunnel Prado Carénage (EPA:SMTPC) A Risky Investment?

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 Société Marseillaise du Tunnel Prado Carénage (EPA:SMTPC) does use debt in its business. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Société Marseillaise du Tunnel Prado Carénage

What Is Société Marseillaise du Tunnel Prado Carénage's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Société Marseillaise du Tunnel Prado Carénage had debt of €57.2m, up from €46.0m in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Société Marseillaise du Tunnel Prado Carénage's Liabilities

According to the last reported balance sheet, Société Marseillaise du Tunnel Prado Carénage had liabilities of €1.89m due within 12 months, and liabilities of €57.2m due beyond 12 months. Offsetting these obligations, it had cash of €3.1k as well as receivables valued at €2.93m due within 12 months. So its liabilities total €56.2m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Société Marseillaise du Tunnel Prado Carénage is worth €132.5m, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Société Marseillaise du Tunnel Prado Carénage's net debt is 2.9 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 19.6 is very high, suggesting that the interest expense on the debt is currently quite low. Shareholders should be aware that Société Marseillaise du Tunnel Prado Carénage's EBIT was down 42% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Société Marseillaise du Tunnel Prado Carénage can strengthen its balance sheet over time. 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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Société Marseillaise du Tunnel Prado Carénage burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Société Marseillaise du Tunnel Prado Carénage's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. We should also note that Infrastructure industry companies like Société Marseillaise du Tunnel Prado Carénage commonly do use debt without problems. Overall, we think it's fair to say that Société Marseillaise du Tunnel Prado Carénage has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. 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. Be aware that Société Marseillaise du Tunnel Prado Carénage is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.

When trading Société Marseillaise du Tunnel Prado Carénage or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.