Here's Why Casino Guichard-Perrachon Société Anonyme (EPA:CO) Has A Meaningful Debt Burden

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Casino, Guichard-Perrachon Société Anonyme (EPA:CO) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Casino Guichard-Perrachon Société Anonyme

What Is Casino Guichard-Perrachon Société Anonyme's Debt?

As you can see below, Casino Guichard-Perrachon Société Anonyme had €9.07b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has €2.13b in cash leading to net debt of about €6.93b.

A Look At Casino Guichard-Perrachon Société Anonyme's Liabilities

The latest balance sheet data shows that Casino Guichard-Perrachon Société Anonyme had liabilities of €11.7b due within a year, and liabilities of €13.0b falling due after that. On the other hand, it had cash of €2.13b and €1.06b worth of receivables due within a year. So its liabilities total €21.5b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €2.24b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Casino Guichard-Perrachon Société Anonyme would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Casino Guichard-Perrachon Société Anonyme's debt to EBITDA ratio (3.6) suggests that it uses some debt, its interest cover is very weak, at 2.0, suggesting high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. However, one redeeming factor is that Casino Guichard-Perrachon Société Anonyme grew its EBIT at 15% over the last 12 months, boosting its ability to handle its debt. 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 Casino Guichard-Perrachon Société Anonyme'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Casino Guichard-Perrachon Société Anonyme produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

To be frank both Casino Guichard-Perrachon Société Anonyme's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Casino Guichard-Perrachon Société Anonyme's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. While Casino Guichard-Perrachon Société Anonyme didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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