Here's Why SC Cemacon (BVB:CEON) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies SC Cemacon SA (BVB:CEON) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 September 2020, a reduction from RON54.3m over a year. However, its balance sheet shows it holds RON45.8m in cash, so it actually has RON12.0m net cash.

How Strong Is SC Cemacon's Balance Sheet?

We can see from the most recent balance sheet that SC Cemacon had liabilities of RON37.0m falling due within a year, and liabilities of RON39.7m due beyond that. Offsetting these obligations, it had cash of RON45.8m as well as receivables valued at RON11.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON19.5m.

Given SC Cemacon has a market capitalization of RON199.2m, 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!

And we also note warmly that SC Cemacon grew its EBIT by 12% last year, making its debt load easier to handle. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about SC Cemacon's liabilities, but we can be reassured by the fact it has has net cash of RON12.0m. So is SC Cemacon's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with SC Cemacon .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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