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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.' 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. As with many other companies Soitec S.A. (EPA:SOI) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
See our latest analysis for Soitec
What Is Soitec's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Soitec had debt of €184.5m, up from €78.3m in one year. However, because it has a cash reserve of €175.3m, its net debt is less, at about €9.20m.
How Strong Is Soitec's Balance Sheet?
According to the last reported balance sheet, Soitec had liabilities of €203.6m due within 12 months, and liabilities of €220.6m due beyond 12 months. Offsetting this, it had €175.3m in cash and €181.5m in receivables that were due within 12 months. So it has liabilities totalling €67.4m more than its cash and near-term receivables, combined.
Given Soitec has a market capitalization of €2.89b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Soitec has virtually no net debt, so it's fair to say it does not have a heavy debt load!
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Soitec has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.07 and EBIT of 23.0 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. In addition to that, we're happy to report that Soitec has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Soitec can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.