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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Interparfums SA (EPA:ITP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Interparfums

What Is Interparfums's Debt?

The image below, which you can click on for greater detail, shows that Interparfums had debt of €123.0m at the end of December 2023, a reduction from €147.0m over a year. However, it does have €146.2m in cash offsetting this, leading to net cash of €23.2m.

How Healthy Is Interparfums' Balance Sheet?

The latest balance sheet data shows that Interparfums had liabilities of €197.0m due within a year, and liabilities of €127.5m falling due after that. On the other hand, it had cash of €146.2m and €143.8m worth of receivables due within a year. So it has liabilities totalling €34.5m more than its cash and near-term receivables, combined.

This state of affairs indicates that Interparfums' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €3.54b 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!

And we also note warmly that Interparfums grew its EBIT by 20% last year, making its debt load easier to handle. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Considering the last three years, Interparfums actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

We could understand if investors are concerned about Interparfums's liabilities, but we can be reassured by the fact it has has net cash of €23.2m. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't have any problem with Interparfums's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Interparfums you should know about.

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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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.