Does Interparfums (EPA:ITP) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Interparfums SA (EPA:ITP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Interparfums

What Is Interparfums's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Interparfums had €130.5m of debt, an increase on €12.0m, over one year. But it also has €221.1m in cash to offset that, meaning it has €90.6m net cash.

A Look At Interparfums' Liabilities

Zooming in on the latest balance sheet data, we can see that Interparfums had liabilities of €144.3m due within 12 months and liabilities of €132.6m due beyond that. Offsetting these obligations, it had cash of €221.1m as well as receivables valued at €140.0m due within 12 months. So it actually has €84.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Interparfums could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Interparfums has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Interparfums grew its EBIT by 129% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Interparfums'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 Interparfums 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. In the last three years, Interparfums created free cash flow amounting to 12% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Interparfums has €90.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 129% over the last year. So is Interparfums's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Interparfums that you should be aware of.

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.

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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