Yahoo Finance S4 Capital (LON:SFOR) Could Easily Take On More Debt
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies S4 Capital plc (LON:SFOR) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for S4 Capital
How Much Debt Does S4 Capital Carry?
The image below, which you can click on for greater detail, shows that at June 2021 S4 Capital had debt of UK£112.2m, up from UK£77.7m in one year. But on the other hand it also has UK£119.6m in cash, leading to a UK£7.32m net cash position.
How Strong Is S4 Capital's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that S4 Capital had liabilities of UK£372.5m due within 12 months and liabilities of UK£178.7m due beyond that. Offsetting this, it had UK£119.6m in cash and UK£227.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£204.3m.
Of course, S4 Capital has a market capitalization of UK£4.44b, so these liabilities are probably manageable. 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, S4 Capital also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that S4 Capital grew its EBIT by 313% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine S4 Capital'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. S4 Capital 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. Happily for any shareholders, S4 Capital actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
We could understand if investors are concerned about S4 Capital's liabilities, but we can be reassured by the fact it has has net cash of UK£7.32m. And it impressed us with free cash flow of UK£31m, being 195% of its EBIT. So is S4 Capital's debt a risk? It doesn't seem so to us. 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. Be aware that S4 Capital is showing 2 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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