Is Sonaecom SGPS (ELI:SNC) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Sonaecom, SGPS, S.A. (ELI:SNC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sonaecom SGPS

What Is Sonaecom SGPS's Net Debt?

The image below, which you can click on for greater detail, shows that Sonaecom SGPS had debt of €3.62m at the end of September 2020, a reduction from €7.77m over a year. But on the other hand it also has €233.1m in cash, leading to a €229.4m net cash position.

How Strong Is Sonaecom SGPS' Balance Sheet?

According to the last reported balance sheet, Sonaecom SGPS had liabilities of €56.9m due within 12 months, and liabilities of €58.1m due beyond 12 months. Offsetting this, it had €233.1m in cash and €32.5m in receivables that were due within 12 months. So it actually has €150.6m more liquid assets than total liabilities.

This surplus strongly suggests that Sonaecom SGPS has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Sonaecom SGPS boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sonaecom SGPS 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 Sonaecom SGPS had a loss before interest and tax, and actually shrunk its revenue by 2.8%, to €130m. We would much prefer see growth.

So How Risky Is Sonaecom SGPS?

Although Sonaecom SGPS had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €24m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sonaecom SGPS is showing 1 warning sign in our investment analysis , you should know about...

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. 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.
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