Is Groupe LDLC société anonyme (EPA:ALLDL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Groupe LDLC société anonyme (EPA:ALLDL) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 Groupe LDLC société anonyme

How Much Debt Does Groupe LDLC société anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that Groupe LDLC société anonyme had €42.6m of debt in September 2020, down from €50.6m, one year before. However, because it has a cash reserve of €36.6m, its net debt is less, at about €6.03m.

A Look At Groupe LDLC société anonyme's Liabilities

We can see from the most recent balance sheet that Groupe LDLC société anonyme had liabilities of €129.2m falling due within a year, and liabilities of €47.7m due beyond that. Offsetting this, it had €36.6m in cash and €55.8m in receivables that were due within 12 months. So its liabilities total €84.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Groupe LDLC société anonyme is worth €282.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Groupe LDLC société anonyme has a low net debt to EBITDA ratio of only 0.18. And its EBIT covers its interest expense a whopping 39.9 times over. So we're pretty relaxed about its super-conservative use of debt. Better yet, Groupe LDLC société anonyme grew its EBIT by 1,188% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Groupe LDLC société anonyme 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, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Groupe LDLC société anonyme burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Groupe LDLC société anonyme's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. Considering this range of data points, we think Groupe LDLC société anonyme is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Groupe LDLC société anonyme is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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. 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.
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