Does SC Cemacon (BVB:CEON) Have A Healthy Balance Sheet?

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. We can see that SC Cemacon SA (BVB:CEON) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SC Cemacon

How Much Debt Does SC Cemacon Carry?

The image below, which you can click on for greater detail, shows that SC Cemacon had debt of RON33.8m at the end of June 2020, a reduction from RON50.0m over a year. However, its balance sheet shows it holds RON35.5m in cash, so it actually has RON1.69m net cash.

A Look At SC Cemacon's Liabilities

The latest balance sheet data shows that SC Cemacon had liabilities of RON39.0m due within a year, and liabilities of RON42.6m falling due after that. Offsetting these obligations, it had cash of RON35.5m as well as receivables valued at RON15.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON30.8m.

Given SC Cemacon has a market capitalization of RON165.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SC Cemacon boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, SC Cemacon saw its EBIT drop by 4.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is SC Cemacon's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SC Cemacon 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 most recent three years, SC Cemacon recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While SC Cemacon does have more liabilities than liquid assets, it also has net cash of RON1.69m. And it impressed us with free cash flow of RON29m, being 73% of its EBIT. So we are not troubled with SC Cemacon'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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with SC Cemacon , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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