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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sopra Steria Group SA (EPA:SOP) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Sopra Steria Group
What Is Sopra Steria Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Sopra Steria Group had €862.0m of debt, an increase on €792.2m, over one year. However, it does have €235.8m in cash offsetting this, leading to net debt of about €626.2m.
How Healthy Is Sopra Steria Group's Balance Sheet?
The latest balance sheet data shows that Sopra Steria Group had liabilities of €2.11b due within a year, and liabilities of €1.03b falling due after that. Offsetting this, it had €235.8m in cash and €1.16b in receivables that were due within 12 months. So it has liabilities totalling €1.74b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of €2.38b, so it does suggest shareholders should keep an eye on Sopra Steria Group's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).