Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Groupe CRIT SA (EPA:CEN) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Groupe CRIT
How Much Debt Does Groupe CRIT Carry?
As you can see below, at the end of December 2020, Groupe CRIT had €34.9m of debt, up from €33.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds €320.0m in cash, so it actually has €285.1m net cash.
A Look At Groupe CRIT's Liabilities
Zooming in on the latest balance sheet data, we can see that Groupe CRIT had liabilities of €453.4m due within 12 months and liabilities of €112.6m due beyond that. Offsetting this, it had €320.0m in cash and €434.8m in receivables that were due within 12 months. So it can boast €188.9m more liquid assets than total liabilities.
It's good to see that Groupe CRIT has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Groupe CRIT boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Groupe CRIT's saving grace is its low debt levels, because its EBIT has tanked 83% in the last twelve months. 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 ultimately the future profitability of the business will decide if Groupe CRIT 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Groupe CRIT 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. Over the last three years, Groupe CRIT actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Groupe CRIT has net cash of €285.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €115m, being 135% of its EBIT. So is Groupe CRIT's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Groupe CRIT you should be aware of.
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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About ENXTPA:CEN
Groupe CRIT
Provides temporary work and recruitment services in France and internationally.
Very undervalued with excellent balance sheet.
