Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that SIMONA Aktiengesellschaft (FRA:SIM) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for SIMONA
How Much Debt Does SIMONA Carry?
As you can see below, SIMONA had €20.1m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have €46.0m in cash offsetting this, leading to net cash of €25.9m.
How Strong Is SIMONA's Balance Sheet?
According to the last reported balance sheet, SIMONA had liabilities of €58.6m due within 12 months, and liabilities of €160.3m due beyond 12 months. On the other hand, it had cash of €46.0m and €84.2m worth of receivables due within a year. So its liabilities total €88.7m more than the combination of its cash and short-term receivables.
SIMONA has a market capitalization of €315.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, SIMONA boasts net cash, so it's fair to say it does not have a heavy debt load!
SIMONA's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SIMONA will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.