These 4 Measures Indicate That Trigano (EPA:TRI) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Trigano S.A. (EPA:TRI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for Trigano

What Is Trigano's Debt?

The image below, which you can click on for greater detail, shows that at February 2022 Trigano had debt of €340.8m, up from €175.2m in one year. However, its balance sheet shows it holds €370.8m in cash, so it actually has €30.1m net cash.

How Strong Is Trigano's Balance Sheet?

The latest balance sheet data shows that Trigano had liabilities of €972.5m due within a year, and liabilities of €285.8m falling due after that. Offsetting these obligations, it had cash of €370.8m as well as receivables valued at €348.9m due within 12 months. So it has liabilities totalling €538.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Trigano has a market capitalization of €1.80b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

On top of that, Trigano grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Trigano 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Trigano 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. During the last three years, Trigano generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

Although Trigano's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €30.1m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in €122m. So we don't think Trigano's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Trigano .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.