Is Gérard Perrier Industrie (EPA:PERR) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Gérard Perrier Industrie S.A. (EPA:PERR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Gérard Perrier Industrie

What Is Gérard Perrier Industrie's Net Debt?

As you can see below, Gérard Perrier Industrie had €15.4m of debt at December 2020, down from €16.3m a year prior. However, it does have €47.6m in cash offsetting this, leading to net cash of €32.2m.

A Look At Gérard Perrier Industrie's Liabilities

Zooming in on the latest balance sheet data, we can see that Gérard Perrier Industrie had liabilities of €66.6m due within 12 months and liabilities of €22.0m due beyond that. Offsetting this, it had €47.6m in cash and €66.6m in receivables that were due within 12 months. So it can boast €25.7m more liquid assets than total liabilities.

This surplus suggests that Gérard Perrier Industrie has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Gérard Perrier Industrie has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Gérard Perrier Industrie if management cannot prevent a repeat of the 20% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gérard Perrier Industrie can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent three years, Gérard Perrier Industrie recorded free cash flow worth 64% 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 it is always sensible to investigate a company's debt, in this case Gérard Perrier Industrie has €32.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Gérard Perrier Industrie's use of debt. 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 1 warning sign for Gérard Perrier Industrie that you should be aware of before investing here.

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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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. 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.
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