We Think Électricite de Strasbourg Société Anonyme (EPA:ELEC) Can Stay On Top Of Its Debt

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 note that Électricite de Strasbourg Société Anonyme (EPA:ELEC) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Électricite de Strasbourg Société Anonyme

How Much Debt Does Électricite de Strasbourg Société Anonyme Carry?

The chart below, which you can click on for greater detail, shows that Électricite de Strasbourg Société Anonyme had €10.8m in debt in June 2020; about the same as the year before. However, its balance sheet shows it holds €113.6m in cash, so it actually has €102.8m net cash.

How Healthy Is Électricite de Strasbourg Société Anonyme's Balance Sheet?

The latest balance sheet data shows that Électricite de Strasbourg Société Anonyme had liabilities of €273.0m due within a year, and liabilities of €983.0m falling due after that. On the other hand, it had cash of €113.6m and €205.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €937.2m.

When you consider that this deficiency exceeds the company's €860.3m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Électricite de Strasbourg Société Anonyme boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Also good is that Électricite de Strasbourg Société Anonyme grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Électricite de Strasbourg Société Anonyme will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Électricite de Strasbourg Société Anonyme 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 three years, Électricite de Strasbourg Société Anonyme's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While Électricite de Strasbourg Société Anonyme does have more liabilities than liquid assets, it also has net cash of €102.8m. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Électricite de Strasbourg Société Anonyme's debt use. 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. Case in point: We've spotted 1 warning sign for Électricite de Strasbourg Société Anonyme 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. 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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