Benefit Systems (WSE:BFT) Has A Rock Solid 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Benefit Systems S.A. (WSE:BFT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Benefit Systems

What Is Benefit Systems's Net Debt?

The image below, which you can click on for greater detail, shows that Benefit Systems had debt of zł76.8m at the end of March 2023, a reduction from zł196.6m over a year. However, its balance sheet shows it holds zł300.2m in cash, so it actually has zł223.4m net cash.

How Healthy Is Benefit Systems' Balance Sheet?

The latest balance sheet data shows that Benefit Systems had liabilities of zł640.1m due within a year, and liabilities of zł958.7m falling due after that. On the other hand, it had cash of zł300.2m and zł164.0m worth of receivables due within a year. So it has liabilities totalling zł1.13b more than its cash and near-term receivables, combined.

Benefit Systems has a market capitalization of zł5.25b, 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. While it does have liabilities worth noting, Benefit Systems also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Benefit Systems grew its EBIT by 292% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Benefit Systems'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Benefit Systems 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 two years, Benefit Systems actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Benefit Systems's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł223.4m. The cherry on top was that in converted 176% of that EBIT to free cash flow, bringing in zł422m. So is Benefit Systems's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Benefit Systems , 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.