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

Warren Buffett famously said, '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. We can see that Interparfums SA (EPA:ITP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

See 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 December 2021 Interparfums had €125.4m of debt, an increase on €11.0m, over one year. But it also has €257.7m in cash to offset that, meaning it has €132.2m net cash.

How Healthy Is Interparfums' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Interparfums had liabilities of €157.3m due within 12 months and liabilities of €121.3m due beyond that. On the other hand, it had cash of €257.7m and €141.4m worth of receivables due within a year. So it can boast €120.4m 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. Succinctly put, Interparfums boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Interparfums grew its EBIT by 111% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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'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. Interparfums may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Interparfums created free cash flow amounting to 18% 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 €132.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 111% year-on-year EBIT growth. So is Interparfums's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Interparfums (including 1 which is a bit concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.