These 4 Measures Indicate That Casino Guichard-Perrachon Société Anonyme (EPA:CO) Is Using Debt Extensively

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.' 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 Casino, Guichard-Perrachon Société Anonyme (EPA:CO) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 Casino Guichard-Perrachon Société Anonyme

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

You can click the graphic below for the historical numbers, but it shows that Casino Guichard-Perrachon Société Anonyme had €8.06b of debt in December 2020, down from €9.65b, one year before. However, it does have €2.75b in cash offsetting this, leading to net debt of about €5.31b.

How Healthy Is Casino Guichard-Perrachon Société Anonyme's Balance Sheet?

According to the last reported balance sheet, Casino Guichard-Perrachon Société Anonyme had liabilities of €11.9b due within 12 months, and liabilities of €12.5b due beyond 12 months. Offsetting these obligations, it had cash of €2.75b as well as receivables valued at €2.24b due within 12 months. So it has liabilities totalling €19.4b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €3.16b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While we wouldn't worry about Casino Guichard-Perrachon Société Anonyme's net debt to EBITDA ratio of 2.8, we think its super-low interest cover of 2.0 times is a sign of high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Fortunately, Casino Guichard-Perrachon Société Anonyme grew its EBIT by 7.5% in the last year, slowly shrinking its debt relative to earnings. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Casino Guichard-Perrachon Société Anonyme 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

On the face of it, Casino Guichard-Perrachon Société Anonyme's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Overall, we think it's fair to say that Casino Guichard-Perrachon Société Anonyme has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. Even though Casino Guichard-Perrachon Société Anonyme lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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