Piscines Desjoyaux (EPA:ALPDX) Seems To Use Debt Quite Sensibly

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. We can see that Piscines Desjoyaux SA (EPA:ALPDX) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Piscines Desjoyaux

What Is Piscines Desjoyaux's Net Debt?

As you can see below, at the end of August 2023, Piscines Desjoyaux had €42.2m of debt, up from €40.4m a year ago. Click the image for more detail. But it also has €79.8m in cash to offset that, meaning it has €37.6m net cash.

How Healthy Is Piscines Desjoyaux's Balance Sheet?

According to the last reported balance sheet, Piscines Desjoyaux had liabilities of €33.8m due within 12 months, and liabilities of €33.2m due beyond 12 months. Offsetting these obligations, it had cash of €79.8m as well as receivables valued at €16.0m due within 12 months. So it can boast €28.9m more liquid assets than total liabilities.

It's good to see that Piscines Desjoyaux has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Piscines Desjoyaux has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Piscines Desjoyaux's load is not too heavy, because its EBIT was down 24% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Piscines Desjoyaux will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Piscines Desjoyaux 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. In the last three years, Piscines Desjoyaux's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Piscines Desjoyaux has net cash of €37.6m, as well as more liquid assets than liabilities. So we are not troubled with Piscines Desjoyaux's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Piscines Desjoyaux 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.

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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.