David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Semperit Aktiengesellschaft Holding (VIE:SEM) does have debt on its balance sheet. But is this debt a concern to shareholders?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Semperit Holding
The chart below, which you can click on for greater detail, shows that Semperit Holding had €172.8m in debt in September 2021; about the same as the year before. But it also has €287.9m in cash to offset that, meaning it has €115.1m net cash.
Zooming in on the latest balance sheet data, we can see that Semperit Holding had liabilities of €300.5m due within 12 months and liabilities of €149.1m due beyond that. On the other hand, it had cash of €287.9m and €113.9m worth of receivables due within a year. So its liabilities total €47.8m more than the combination of its cash and short-term receivables.
Since publicly traded Semperit Holding shares are worth a total of €555.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Semperit Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, Semperit Holding grew its EBIT by 317% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Semperit Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Semperit Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Semperit Holding generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Semperit Holding has €115.1m in net cash. And it impressed us with free cash flow of €282m, being 85% of its EBIT. So we don't think Semperit Holding's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Semperit Holding (of which 1 shouldn't be ignored!) you should know about.
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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