Is Salcef Group (BIT:SCF) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Salcef Group S.p.A. (BIT:SCF) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Salcef Group

What Is Salcef Group's Debt?

As you can see below, at the end of December 2021, Salcef Group had €142.4m of debt, up from €113.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds €267.8m in cash, so it actually has €125.4m net cash.

How Strong Is Salcef Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Salcef Group had liabilities of €225.0m due within 12 months and liabilities of €98.0m due beyond that. Offsetting this, it had €267.8m in cash and €227.7m in receivables that were due within 12 months. So it actually has €172.5m more liquid assets than total liabilities.

This surplus suggests that Salcef Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Salcef Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Salcef Group grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Salcef Group 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, a company can only pay off debt with cold hard cash, not accounting profits. Salcef Group 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, Salcef Group created free cash flow amounting to 8.4% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Salcef Group has €125.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 20% year-on-year EBIT growth. So we are not troubled with Salcef Group's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with Salcef Group .

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. 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.