SeSa (BIT:SES) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, SeSa S.p.A. (BIT:SES) does carry debt. But is this debt a concern to shareholders?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SeSa

What Is SeSa's Debt?

The image below, which you can click on for greater detail, shows that at January 2022 SeSa had debt of €334.2m, up from €303.5m in one year. But on the other hand it also has €405.5m in cash, leading to a €71.3m net cash position.

How Healthy Is SeSa's Balance Sheet?

The latest balance sheet data shows that SeSa had liabilities of €877.8m due within a year, and liabilities of €319.9m falling due after that. Offsetting these obligations, it had cash of €405.5m as well as receivables valued at €624.7m due within 12 months. So its liabilities total €167.5m more than the combination of its cash and short-term receivables.

Of course, SeSa has a market capitalization of €2.24b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SeSa boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that SeSa has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. 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 SeSa 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. While SeSa has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, SeSa actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that SeSa has €71.3m in net cash. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in €142m. So is SeSa's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in SeSa, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.