Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. We note that Gérard Perrier Industrie S.A. (EPA:PERR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Gérard Perrier Industrie’s Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Gérard Perrier Industrie had debt of €17.4m, up from €14.0 in one year. But on the other hand it also has €34.4m in cash, leading to a €17.0m net cash position.
How Healthy Is Gérard Perrier Industrie’s Balance Sheet?
The latest balance sheet data shows that Gérard Perrier Industrie had liabilities of €65.8m due within a year, and liabilities of €24.1m falling due after that. Offsetting these obligations, it had cash of €34.4m as well as receivables valued at €69.5m due within 12 months. So it actually has €14.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Gérard Perrier Industrie could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gérard Perrier Industrie boasts net cash, so it’s fair to say it does not have a heavy debt load!
And we also note warmly that Gérard Perrier Industrie grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gérard Perrier Industrie can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Gérard Perrier Industrie has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Gérard Perrier Industrie produced sturdy free cash flow equating to 53% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Gérard Perrier Industrie has net cash of €17.0m, as well as more liquid assets than liabilities. And it also grew its EBIT by 14% over the last year. So is Gérard Perrier Industrie’s debt a risk? It doesn’t seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 2 warning signs for Gérard Perrier Industrie which any shareholder or potential investor should be aware of.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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