Publicis Groupe (EPA:PUB) Has A Rock Solid Balance Sheet

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 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. Importantly, Publicis Groupe S.A. (EPA:PUB) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Publicis Groupe

What Is Publicis Groupe's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Publicis Groupe had €4.00b of debt, an increase on €3.75b, over one year. However, its balance sheet shows it holds €4.62b in cash, so it actually has €612.0m net cash.

How Strong Is Publicis Groupe's Balance Sheet?

The latest balance sheet data shows that Publicis Groupe had liabilities of €20.4b due within a year, and liabilities of €5.91b falling due after that. Offsetting this, it had €4.62b in cash and €13.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €7.98b.

This deficit isn't so bad because Publicis Groupe is worth a massive €18.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Publicis Groupe boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Publicis Groupe grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. 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 Publicis Groupe can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Publicis Groupe 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. Over the last three years, Publicis Groupe actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Publicis Groupe's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €612.0m. And it impressed us with free cash flow of €2.2b, being 131% of its EBIT. So we don't think Publicis Groupe's use of debt is risky. 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. Be aware that Publicis Groupe is showing 1 warning sign in our investment analysis , you should know about...

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.