Interparfums (EPA:ITP) Has A Pretty Healthy Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Interparfums SA (EPA:ITP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Interparfums

What Is Interparfums's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Interparfums had debt of €134.9m, up from €100.2m in one year. However, its balance sheet shows it holds €167.5m in cash, so it actually has €32.6m net cash.

How Strong Is Interparfums' Balance Sheet?

The latest balance sheet data shows that Interparfums had liabilities of €222.1m due within a year, and liabilities of €134.2m falling due after that. Offsetting this, it had €167.5m in cash and €157.5m in receivables that were due within 12 months. So it has liabilities totalling €31.4m more than its cash and near-term receivables, combined.

Having regard to Interparfums' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €3.63b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Interparfums boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Interparfums has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. 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 Interparfums can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Interparfums reported free cash flow worth 6.7% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Interparfums has €32.6m in net cash. And it impressed us with its EBIT growth of 58% over the last year. So we don't think Interparfums's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Interparfums's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.