Is Trigano (EPA:TRI) A Risky Investment?

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. Importantly, Trigano S.A. (EPA:TRI) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Trigano

What Is Trigano's Net Debt?

The image below, which you can click on for greater detail, shows that Trigano had debt of €164.4m at the end of August 2023, a reduction from €321.7m over a year. But it also has €359.0m in cash to offset that, meaning it has €194.6m net cash.

How Strong Is Trigano's Balance Sheet?

The latest balance sheet data shows that Trigano had liabilities of €718.5m due within a year, and liabilities of €204.7m falling due after that. On the other hand, it had cash of €359.0m and €289.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €275.1m.

Of course, Trigano has a market capitalization of €2.61b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Trigano also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Trigano has been able to increase its EBIT by 24% in twelve months, making it easier to pay down 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 Trigano's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Trigano 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. Over the most recent three years, Trigano recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Trigano does have more liabilities than liquid assets, it also has net cash of €194.6m. And it impressed us with its EBIT growth of 24% over the last year. So we don't think Trigano's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Trigano, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.