These 4 Measures Indicate That SeSa (BIT:SES) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies SeSa S.p.A. (BIT:SES) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SeSa

How Much Debt Does SeSa Carry?

The image below, which you can click on for greater detail, shows that at April 2023 SeSa had debt of €461.7m, up from €362.0m in one year. But it also has €545.5m in cash to offset that, meaning it has €83.8m net cash.

How Healthy Is SeSa's Balance Sheet?

According to the last reported balance sheet, SeSa had liabilities of €837.4m due within 12 months, and liabilities of €660.7m due beyond 12 months. Offsetting these obligations, it had cash of €545.5m as well as receivables valued at €530.3m due within 12 months. So its liabilities total €422.3m more than the combination of its cash and short-term receivables.

SeSa has a market capitalization of €1.63b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, SeSa boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that SeSa has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SeSa's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. SeSa 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. 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

Although SeSa's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €83.8m. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in €107m. 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 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. 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.