Does Société Financière des Caoutchoucs (BDL:SOFIN) Have A Healthy Balance Sheet?

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.' 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 Société Financière des Caoutchoucs S.A. (BDL:SOFIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

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What Is Société Financière des Caoutchoucs's Debt?

The image below, which you can click on for greater detail, shows that Société Financière des Caoutchoucs had debt of €116.3m at the end of June 2022, a reduction from €197.2m over a year. But it also has €183.1m in cash to offset that, meaning it has €66.7m net cash.

How Healthy Is Société Financière des Caoutchoucs' Balance Sheet?

According to the last reported balance sheet, Société Financière des Caoutchoucs had liabilities of €316.6m due within 12 months, and liabilities of €148.5m due beyond 12 months. Offsetting this, it had €183.1m in cash and €123.9m in receivables that were due within 12 months. So its liabilities total €158.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Société Financière des Caoutchoucs is worth €283.2m, and thus could probably raise enough capital to shore up 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, Société Financière des Caoutchoucs 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 Société Financière des Caoutchoucs has boosted its EBIT by 94%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Société Financière des Caoutchoucs's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Société Financière des Caoutchoucs 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. During the last three years, Société Financière des Caoutchoucs produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Société Financière des Caoutchoucs does have more liabilities than liquid assets, it also has net cash of €66.7m. And it impressed us with its EBIT growth of 94% over the last year. So is Société Financière des Caoutchoucs's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Société Financière des Caoutchoucs that you should be aware of.

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.