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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Groupe LDLC société anonyme (EPA:ALLDL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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.

See our latest analysis for Groupe LDLC société anonyme

How Much Debt Does Groupe LDLC société anonyme Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Groupe LDLC société anonyme had debt of €42.9m, up from €26.8m in one year. However, it does have €49.7m in cash offsetting this, leading to net cash of €6.87m.

A Look At Groupe LDLC société anonyme's Liabilities

Zooming in on the latest balance sheet data, we can see that Groupe LDLC société anonyme had liabilities of €140.8m due within 12 months and liabilities of €39.4m due beyond that. Offsetting these obligations, it had cash of €49.7m as well as receivables valued at €41.9m due within 12 months. So it has liabilities totalling €88.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €109.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Groupe LDLC société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Groupe LDLC société anonyme if management cannot prevent a repeat of the 68% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Groupe LDLC société anonyme's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Groupe LDLC société anonyme 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 most recent three years, Groupe LDLC société anonyme recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Groupe LDLC société anonyme's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €6.87m. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in €16m. So although we see some areas for improvement, we're not too worried about Groupe LDLC société anonyme's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Groupe LDLC société anonyme has 1 warning sign we think you should be aware of.

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.