We believe Sopra Steria Group (EPA:SOP) can manage its debt with ease

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Sopra Steria Group SA (EPA:SOP) uses debt. But does this debt worry shareholders?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Sopra Steria Group

What is Sopra Steria Group’s debt?

The image below, which you can click on for more details, shows that Sopra Steria Group had a debt of €327.1m at the end of December 2021, compared to €672.0m over one year. However, he also had €248.3 million in cash, so his net debt is €78.8 million.

ENXTPA: History of Debt to Equity February 26, 2022

Focus on the liabilities of Sopra Steria Group

The latest balance sheet data show that Sopra Steria Group had liabilities of 1.22 billion euros at less than one year and liabilities of 1.08 billion euros at later maturity. In return, it had 248.3 million euros in cash and 1.02 billion euros in receivables due within 12 months. It therefore has liabilities totaling 1.03 billion euros more than its cash and short-term receivables, combined.

While that may sound like a lot, it’s not too bad since Sopra Steria Group has a market capitalization of 3.24 billion euros, so it could probably strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.

We measure a company’s leverage against its earning power 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 charge (interest coverage). Thus, we consider debt to earnings with and without depreciation and amortization charges.

Sopra Steria Group has a low net debt to EBITDA ratio of just 0.17. And its EBIT covers its interest charges 34.9 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Another positive point is that Sopra Steria Group has increased its EBIT by 23% over the last year, which should facilitate the repayment of debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is above all future results that will determine Sopra Steria Group’s ability to maintain a healthy balance sheet for the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Sopra Steria Group has generated more free cash flow than EBIT. There’s nothing better than incoming money to stay in the good books of your lenders.

Our point of view

Fortunately, Sopra Steria Group’s impressive interest coverage means it has the upper hand on its debt. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. On a larger scale, we believe that the use of debt by Sopra Steria Group seems entirely reasonable and does not worry us. After all, reasonable leverage can increase return on equity. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you have also realized this, you are in luck, because today you can consult this interactive chart of the historical earnings per share of Sopra Steria Group for free.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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