Benefit Systems (WSE:BFT) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Benefit Systems S.A. (WSE:BFT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Benefit Systems

How Much Debt Does Benefit Systems Carry?

The image below, which you can click on for greater detail, shows that Benefit Systems had debt of zł52.6m at the end of June 2024, a reduction from zł69.9m over a year. But it also has zł521.2m in cash to offset that, meaning it has zł468.5m net cash.

How Strong Is Benefit Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Benefit Systems had liabilities of zł1.16b due within 12 months and liabilities of zł1.02b due beyond that. On the other hand, it had cash of zł521.2m and zł220.8m worth of receivables due within a year. So its liabilities total zł1.44b more than the combination of its cash and short-term receivables.

Given Benefit Systems has a market capitalization of zł7.62b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In addition to that, we're happy to report that Benefit Systems has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Benefit Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Happily for any shareholders, Benefit Systems actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 zł468.5m. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in zł698m. 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. For instance, we've identified 1 warning sign for Benefit Systems that you should be aware of.

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.