Is Groupe Partouche (EPA:PARP) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Groupe Partouche SA (EPA:PARP) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Partouche

How Much Debt Does Groupe Partouche Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2021 Groupe Partouche had €232.0m of debt, an increase on €146.8m, over one year. However, it does have €125.2m in cash offsetting this, leading to net debt of about €106.8m.

A Look At Groupe Partouche's Liabilities

Zooming in on the latest balance sheet data, we can see that Groupe Partouche had liabilities of €255.0m due within 12 months and liabilities of €215.5m due beyond that. Offsetting this, it had €125.2m in cash and €52.4m in receivables that were due within 12 months. So it has liabilities totalling €293.0m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €204.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Groupe Partouche's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Groupe Partouche made a loss at the EBIT level, and saw its revenue drop to €207m, which is a fall of 48%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Groupe Partouche's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €83m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €69m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. We've identified 3 warning signs with Groupe Partouche (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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