Is Groupe CRIT (EPA:CEN) 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.' 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. Importantly, Groupe CRIT SA (EPA:CEN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Groupe CRIT

What Is Groupe CRIT's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Groupe CRIT had €48.5m of debt, an increase on €37.9m, over one year. But on the other hand it also has €512.6m in cash, leading to a €464.1m net cash position.

How Healthy Is Groupe CRIT's Balance Sheet?

According to the last reported balance sheet, Groupe CRIT had liabilities of €626.1m due within 12 months, and liabilities of €100.0m due beyond 12 months. Offsetting these obligations, it had cash of €512.6m as well as receivables valued at €572.0m due within 12 months. So it can boast €358.4m 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. Succinctly put, Groupe CRIT boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Groupe CRIT grew its EBIT by 4.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Happily for any shareholders, Groupe CRIT actually produced more free cash flow than EBIT over the last three years. 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 €464.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in €152m. So we don't think Groupe CRIT's use of debt is risky. 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. Be aware that Groupe CRIT is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.