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 “. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Submarine 7 SA (OB: SUBC) uses debt in his business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels together.
Check out our latest review for Subsea 7
How much debt is Subsea 7?
You can click on the graph below for historical numbers, but it shows that Subsea 7 had a debt of US $ 196.7 million as of June 2021, up from US $ 221.3 million a year earlier. However, his balance sheet shows that he has $ 389.8 million in cash, so he actually has $ 193.1 million in net cash.
A look at the responsibilities of Subsea 7
The latest balance sheet data shows that Subsea 7 had $ 1.67 billion in debt due within one year, and $ 431.3 million in debt due thereafter. In compensation for these obligations, it had cash of US $ 389.8 million as well as receivables valued at US $ 1.47 billion due within 12 months. Its liabilities therefore total US $ 247.2 million more than the combination of its cash and short-term receivables.
Of course, Subsea 7 has a market cap of $ 2.26 billion, so those liabilities are likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable liabilities, Subsea 7 has a clean cash flow, so it’s fair to say that it doesn’t have a lot of debt!
It was also good to see that despite losing money on the EBIT line last year, Subsea 7 has been a game changer over the past 12 months, delivering EBIT of US $ 249 million. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Subsea 7’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only repay its debts with hard cash, not with book profits. Subsea 7 may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. . to manage debt. In the most recent year, Subsea 7 recorded free cash flow of 47% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Although Subsea 7 has more liabilities than liquid assets, it also has net cash of US $ 193.1 million. We are therefore not concerned with the use of Subsea 7 debt. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 1 warning sign with Subsea 7 and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
If you are looking to trade Subsea 7, open an account with the cheapest * professional approved platform, Interactive brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account. Promoted
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 does not have any position in the mentioned stocks.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.