We Think Société Financière des Caoutchoucs (BDL:SOFIN) 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 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 Société Financière des Caoutchoucs S.A. (BDL:SOFIN) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Société Financière des Caoutchoucs

What Is Société Financière des Caoutchoucs's Net Debt?

The image below, which you can click on for greater detail, shows that Société Financière des Caoutchoucs had debt of €98.7m at the end of December 2022, a reduction from €164.4m over a year. But it also has €180.3m in cash to offset that, meaning it has €81.6m net cash.

How Strong Is Société Financière des Caoutchoucs' Balance Sheet?

The latest balance sheet data shows that Société Financière des Caoutchoucs had liabilities of €255.5m due within a year, and liabilities of €126.6m falling due after that. On the other hand, it had cash of €180.3m and €55.2m worth of receivables due within a year. So it has liabilities totalling €146.6m more than its cash and near-term receivables, combined.

Société Financière des Caoutchoucs has a market capitalization of €337.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Société Financière des Caoutchoucs also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Société Financière des Caoutchoucs grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Société Financière des Caoutchoucs will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Société Financière des Caoutchoucs 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. During the last three years, Société Financière des Caoutchoucs produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Société Financière des Caoutchoucs does have more liabilities than liquid assets, it also has net cash of €81.6m. And it impressed us with free cash flow of €205m, being 72% of its EBIT. 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. We've identified 2 warning signs with Société Financière des Caoutchoucs (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.