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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Interparfums's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Interparfums had €133.4m of debt, an increase on €123.0m, over one year. But on the other hand it also has €183.1m in cash, leading to a €49.6m net cash position.

How Healthy Is Interparfums' Balance Sheet?

According to the last reported balance sheet, Interparfums had liabilities of €216.3m due within 12 months, and liabilities of €118.0m due beyond 12 months. Offsetting this, it had €183.1m in cash and €176.0m in receivables that were due within 12 months. So it actually has €24.7m more liquid assets than total liabilities.

Having regard to Interparfums' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €3.01b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Interparfums has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Interparfums

The good news is that Interparfums has increased its EBIT by 7.5% over twelve months, which should ease any concerns about debt repayment. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Looking at the most recent three years, Interparfums recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Interparfums has €49.6m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 7.5% in the last twelve months. So we don't have any problem with Interparfums's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Interparfums that you should be aware of before investing here.

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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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.