Does Subsea 7 (OB:SUBC) Have A Healthy Balance Sheet?

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. We can see that Subsea 7 S.A. (OB:SUBC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Subsea 7

What Is Subsea 7's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Subsea 7 had US$378.8m of debt, an increase on US$202.9m, over one year. But it also has US$499.5m in cash to offset that, meaning it has US$120.7m net cash.

A Look At Subsea 7's Liabilities

The latest balance sheet data shows that Subsea 7 had liabilities of US$1.85b due within a year, and liabilities of US$634.9m falling due after that. On the other hand, it had cash of US$499.5m and US$1.74b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$251.5m.

Given Subsea 7 has a market capitalization of US$2.61b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Subsea 7 boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Subsea 7 improved its EBIT from a last year's loss to a positive US$52m. 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 Subsea 7 can strengthen its balance sheet over time. 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. Subsea 7 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. Happily for any shareholders, Subsea 7 actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Subsea 7's liabilities, but we can be reassured by the fact it has has net cash of US$120.7m. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in US$66m. So we are not troubled with Subsea 7'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. We've identified 1 warning sign with Subsea 7 , and understanding them should be part of your investment process.

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.