Is the SIS (NSE: SIS) using too much debt?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies SIS Limited (NSE: SIS) uses debt. But does this debt worry shareholders?
When is debt a problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for SIS
How many debts does SIS have?
As you can see below, at the end of March 2021, SIS had 14.7 billion yen in debt, up from 13.3 billion yen a year ago. Click on the image for more details. However, he also had 10.4 billion yen in cash, so his net debt is 4.38 billion yen.
A look at the responsibilities of SIS
We can see from the most recent balance sheet that SIS had liabilities of 21.8 billion yen due within one year and liabilities of 10.2 billion yen beyond. In compensation for these obligations, he had cash of 10.4 billion euros as well as receivables valued at 16.6 billion euros within 12 months. It therefore has liabilities totaling 5.16 billion yen more than its cash and short-term receivables combined.
Given that SIS has a market capitalization of Â£ 72.7 billion, it is hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
SIS has net debt of just 0.91 times EBITDA, which suggests it could increase its leverage without breaking a sweat. And remarkably, despite her net debt, she actually received more interest in the past twelve months than she had to pay. So there is no doubt that this company can go into debt while still being cool as a cucumber. The good news is that SIS increased its EBIT by 5.3% year-over-year, which should allay concerns about debt repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether SIS can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, SIS has generated free cash flow of 93% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
Our point of view
SIS’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! When zoomed out, SIS appears to be using the debt quite reasonably; and that gets the nod from us. After all, reasonable leverage can increase returns on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Example: we have spotted 2 warning signs for SIS you must be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in any of the stocks mentioned.
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