Using too much debt?

Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice.” know worries ”. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor, when you assess the risk level of a business. We notice that Soitec SA (EPA: SOI) has debts on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance growth without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together by settle your payday loans.

See our latest analysis for Soitec

How much debt is Soitec?

You can click on the graph below for historical figures, but it shows that as of September 2020, Soitec had € 246.2m in debt, an increase of € 178.2m over one year. However, his balance sheet shows that he holds € 300.2 million in cash, therefore € 53.9 million in net cash.

ENXTPA: SOI debt / equity history March 10, 2021

How healthy is Soitec’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Soitec had a liability of € 225.4m within 12 months and a liability of € 297.4m beyond. In return for these obligations, he has cash of € 300.2 million as well as receivables valued at € 164.4 million within 12 months. Its liabilities therefore outweigh the sum of its cash and its (short-term) receivables of € 58.3 million.

This state of affairs indicates that Soitec’s balance sheet appears to be quite strong, with its total liabilities roughly equal to its cash. So the € 5.47 billion company is highly unlikely to be cash-strapped, but still worth keeping an eye on the balance sheet. While she has some liabilities to note, Soitec also has more cash than debt, so we’re pretty confident that she can handle her debt safely.

In contrast, Soitec’s EBIT plunged 12% compared to last year. If this rate of decline in profits continues, the company could find itself in a difficult situation. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Soitec’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Finally, a business can only pay off its debts with cash, not book profits. While Soitec has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand where speed it builds (or erodes) that cash balance. . Over the past three years, Soitec has posted free cash flow of 7.9% of its EBIT, which is really quite low. For us, the cash conversion that arouses a bit of paranoia is the ability to extinguish debt.

To summarize

While it is always wise to look at the total liabilities of a company, it is very reassuring that Soitec has € 53.9 million in net cash. We are therefore not concerned about the use of debt by Soitec. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for Soitec which you should be aware of before investing here.

Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, then feel free to find out. our exclusive list of net cash growth stocks, today.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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