Interparfums (EPA:ITP) Seems To Use Debt Quite Sensibly

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 Interparfums SA (EPA:ITP) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Interparfums

How Much Debt Does Interparfums Carry?

As you can see below, at the end of December 2020, Interparfums had €11.0m of debt, up from €10.0m a year ago. Click the image for more detail. But on the other hand it also has €228.2m in cash, leading to a €217.2m net cash position.

A Look At Interparfums' Liabilities

Zooming in on the latest balance sheet data, we can see that Interparfums had liabilities of €101.6m due within 12 months and liabilities of €21.0m due beyond that. On the other hand, it had cash of €228.2m and €91.2m worth of receivables due within a year. So it actually has €196.7m 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!

It is just as well that Interparfums's load is not too heavy, because its EBIT was down 36% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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. During the last three years, Interparfums produced sturdy free cash flow equating to 68% 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

While we empathize with investors who find debt concerning, you should keep in mind that Interparfums has net cash of €217.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €36m, being 68% of its EBIT. So we are not troubled with Interparfums's debt use. 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.

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.

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