Does Sevenet (WSE:SEV) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Sevenet S.A. (WSE:SEV) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sevenet

What Is Sevenet's Debt?

The image below, which you can click on for greater detail, shows that Sevenet had debt of zł7.65m at the end of September 2021, a reduction from zł13.5m over a year. But on the other hand it also has zł16.9m in cash, leading to a zł9.23m net cash position.

How Strong Is Sevenet's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sevenet had liabilities of zł37.4m due within 12 months and liabilities of zł19.9m due beyond that. Offsetting this, it had zł16.9m in cash and zł30.2m in receivables that were due within 12 months. So its liabilities total zł10.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Sevenet has a market capitalization of zł26.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Sevenet boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Sevenet 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.

In the last year Sevenet had a loss before interest and tax, and actually shrunk its revenue by 42%, to zł71m. That makes us nervous, to say the least.

So How Risky Is Sevenet?

While Sevenet lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of zł152k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example Sevenet has 6 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.