Groupe CRIT (EPA:CEN) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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 Groupe CRIT SA (EPA:CEN) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Groupe CRIT

What Is Groupe CRIT's Net Debt?

The image below, which you can click on for greater detail, shows that Groupe CRIT had debt of €32.6m at the end of June 2021, a reduction from €36.6m over a year. However, its balance sheet shows it holds €356.1m in cash, so it actually has €323.4m net cash.

How Strong Is Groupe CRIT's Balance Sheet?

We can see from the most recent balance sheet that Groupe CRIT had liabilities of €489.3m falling due within a year, and liabilities of €115.5m due beyond that. Offsetting these obligations, it had cash of €356.1m as well as receivables valued at €465.7m due within 12 months. So it can boast €217.0m more liquid assets than total liabilities.

This surplus strongly suggests that Groupe CRIT has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Groupe CRIT 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 Groupe CRIT if management cannot prevent a repeat of the 29% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Groupe CRIT'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 Groupe CRIT 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 last three years, Groupe CRIT actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Groupe CRIT has €323.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €50m, being 182% of its EBIT. So is Groupe CRIT's debt a risk? It doesn't seem so to us. 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. Be aware that Groupe CRIT is showing 1 warning sign in our investment analysis , you should know about...

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. 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.