These 4 Measures Indicate That Interparfums (EPA:ITP) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Interparfums SA (EPA:ITP) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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

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. However, its balance sheet shows it holds €228.2m in cash, so it actually has €217.2m net cash.

How Strong Is Interparfums' Balance Sheet?

According to the last reported balance sheet, Interparfums had liabilities of €101.6m due within 12 months, and liabilities of €21.0m due beyond 12 months. Offsetting this, it had €228.2m in cash and €91.2m in receivables that were due within 12 months. So it actually has €196.7m more liquid assets than total liabilities.

This surplus suggests that Interparfums has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Interparfums has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Interparfums's load is not too heavy, because its EBIT was down 36% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in €36m. So we don't have any problem with Interparfums's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Interparfums .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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