Yahoo Finance SDL (LON:SDL) Has A Pretty Healthy Balance Sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, SDL plc (LON:SDL) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for SDL
What Is SDL's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 SDL had UK£12.0m of debt, an increase on none, over one year. But on the other hand it also has UK£13.1m in cash, leading to a UK£1.10m net cash position.
How Healthy Is SDL's Balance Sheet?
We can see from the most recent balance sheet that SDL had liabilities of UK£114.2m falling due within a year, and liabilities of UK£41.2m due beyond that. Offsetting this, it had UK£13.1m in cash and UK£124.7m in receivables that were due within 12 months. So its liabilities total UK£17.6m more than the combination of its cash and short-term receivables.
Given SDL has a market capitalization of UK£484.8m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SDL boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, SDL grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. 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 SDL'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, a company can only pay off debt with cold hard cash, not accounting profits. SDL 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. Over the last three years, SDL reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing up
We could understand if investors are concerned about SDL's liabilities, but we can be reassured by the fact it has has net cash of UK£1.10m. And we liked the look of last year's 40% year-on-year EBIT growth. So is SDL's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that SDL insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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.
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