Stock Analysis

S.C. Romcarbon (BVB:ROCE) Has A Somewhat Strained Balance Sheet

BVB:ROCE
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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 S.C. Romcarbon S.A. (BVB:ROCE) 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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for S.C. Romcarbon

What Is S.C. Romcarbon's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 S.C. Romcarbon had debt of RON81.1m, up from RON67.2m in one year. However, it does have RON15.4m in cash offsetting this, leading to net debt of about RON65.7m.

debt-equity-history-analysis
BVB:ROCE Debt to Equity History December 9th 2022

How Strong Is S.C. Romcarbon's Balance Sheet?

We can see from the most recent balance sheet that S.C. Romcarbon had liabilities of RON137.6m falling due within a year, and liabilities of RON28.4m due beyond that. Offsetting this, it had RON15.4m in cash and RON61.8m in receivables that were due within 12 months. So it has liabilities totalling RON88.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RON105.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

S.C. Romcarbon's net debt is sitting at a very reasonable 2.5 times its EBITDA, while its EBIT covered its interest expense just 6.2 times last year. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. Notably, S.C. Romcarbon's EBIT launched higher than Elon Musk, gaining a whopping 134% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is S.C. Romcarbon'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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, S.C. Romcarbon recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

S.C. Romcarbon's conversion of EBIT to free cash flow and level of total liabilities definitely weigh on it, in our esteem. But its EBIT growth rate tells a very different story, and suggests some resilience. When we consider all the factors discussed, it seems to us that S.C. Romcarbon is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for S.C. Romcarbon (2 can't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.