These 4 Measures Indicate That Gérard Perrier Industrie (EPA:PERR) Is Using Debt Reasonably Well

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Gérard Perrier Industrie S.A. (EPA:PERR) does use debt in its business. But the real question is whether this debt is making the company risky.

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 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Gérard Perrier Industrie

How Much Debt Does Gérard Perrier Industrie Carry?

As you can see below, Gérard Perrier Industrie had €23.2m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €44.7m in cash, so it actually has €21.4m net cash.

A Look At Gérard Perrier Industrie's Liabilities

We can see from the most recent balance sheet that Gérard Perrier Industrie had liabilities of €95.9m falling due within a year, and liabilities of €33.1m due beyond that. Offsetting this, it had €44.7m in cash and €97.4m in receivables that were due within 12 months. So it actually has €13.1m 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. Succinctly put, Gérard Perrier Industrie boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Gérard Perrier Industrie grew its EBIT at 14% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Gérard Perrier Industrie'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 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. Looking at the most recent three years, Gérard Perrier Industrie recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gérard Perrier Industrie has €21.4m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 14% over the last year. So we are not troubled with Gérard Perrier Industrie's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Gérard Perrier Industrie , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.