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. We note that Gévelot SA (EPA:ALGEV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Gévelot’s Debt?
As you can see below, Gévelot had €7.67m of debt at December 2018, down from €12.9m a year prior. But on the other hand it also has €174.5m in cash, leading to a €166.8m net cash position.
How Healthy Is Gévelot’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Gévelot had liabilities of €77.2m due within 12 months and liabilities of €11.7m due beyond that. Offsetting this, it had €174.5m in cash and €42.9m in receivables that were due within 12 months. So it actually has €128.6m more liquid assets than total liabilities.
This luscious liquidity implies that Gévelot’s balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Gévelot boasts net cash, so it’s fair to say it does not have a heavy debt load!
It is just as well that Gévelot’s load is not too heavy, because its EBIT was down 71% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Gévelot will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gévelot 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. Happily for any shareholders, Gévelot actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While we empathize with investors who find debt concerning, you should keep in mind that Gévelot has net cash of €167m, as well as more liquid assets than liabilities. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in €15m. So is Gévelot’s debt a risk? It doesn’t seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you’ve also come to that realization, you’re in luck, because today you can view this interactive graph of Gévelot’s earnings per share history for free.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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