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.' 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. As with many other companies Casino, Guichard-Perrachon Société Anonyme (EPA:CO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 €1.82b of debt in June 2021, down from €9.08b, one year before. But it also has €2.13b in cash to offset that, meaning it has €310.0m net cash.

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

We can see from the most recent balance sheet that Casino Guichard-Perrachon Société Anonyme had liabilities of €11.7b falling due within a year, and liabilities of €13.0b due beyond 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.

The deficiency here weighs heavily on the €2.56b 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. At the end of the day, Casino Guichard-Perrachon Société Anonyme would probably need a major re-capitalization if its creditors were to demand repayment. Given that Casino Guichard-Perrachon Société Anonyme has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It is well worth noting that Casino Guichard-Perrachon Société Anonyme's EBIT shot up like bamboo after rain, gaining 57% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. 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 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. While Casino Guichard-Perrachon Société Anonyme has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Casino Guichard-Perrachon Société Anonyme produced sturdy free cash flow equating to 66% 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.

Summing up

Although Casino Guichard-Perrachon Société Anonyme's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €310.0m. And it impressed us with its EBIT growth of 57% over the last year. So although we see some areas for improvement, we're not too worried about Casino Guichard-Perrachon Société Anonyme's balance sheet. 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.

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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This article by Simply Wall St is general in nature. 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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