Ipsen (EPA:IPN) Has A Pretty Healthy Balance Sheet

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 Ipsen S.A. (EPA:IPN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Ipsen

What Is Ipsen's Net Debt?

As you can see below, Ipsen had €773.2m of debt at December 2022, down from €816.2m a year prior. But on the other hand it also has €1.17b in cash, leading to a €396.1m net cash position.

How Healthy Is Ipsen's Balance Sheet?

We can see from the most recent balance sheet that Ipsen had liabilities of €1.34b falling due within a year, and liabilities of €935.8m due beyond that. Offsetting these obligations, it had cash of €1.17b as well as receivables valued at €673.7m due within 12 months. So it has liabilities totalling €428.2m more than its cash and near-term receivables, combined.

Given Ipsen has a market capitalization of €8.91b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ipsen boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Ipsen saw its EBIT decline by 4.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ipsen'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 company can only pay off debt with cold hard cash, not accounting profits. While Ipsen 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, Ipsen produced sturdy free cash flow equating to 72% 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

We could understand if investors are concerned about Ipsen's liabilities, but we can be reassured by the fact it has has net cash of €396.1m. And it impressed us with free cash flow of €718m, being 72% of its EBIT. So is Ipsen's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Ipsen, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.