Is Centrale d'Achat Française pour l'Outre-Mer Société Anonyme (EPA:CAFO) A Risky Investment?

Warren Buffett famously said, '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. We note that Centrale d'Achat Française pour l'Outre-Mer Société Anonyme (EPA:CAFO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme

How Much Debt Does Centrale d'Achat Française pour l'Outre-Mer Société Anonyme Carry?

As you can see below, at the end of March 2021, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme had €66.4m of debt, up from €63.7m a year ago. Click the image for more detail. However, it does have €33.9m in cash offsetting this, leading to net debt of about €32.5m.

A Look At Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's Liabilities

Zooming in on the latest balance sheet data, we can see that Centrale d'Achat Française pour l'Outre-Mer Société Anonyme had liabilities of €142.3m due within 12 months and liabilities of €171.5m due beyond that. On the other hand, it had cash of €33.9m and €32.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €247.4m.

This deficit casts a shadow over the €126.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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).

Centrale d'Achat Française pour l'Outre-Mer Société Anonyme has a low net debt to EBITDA ratio of only 0.91. And its EBIT covers its interest expense a whopping 13.2 times over. So we're pretty relaxed about its super-conservative use of debt. Better yet, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme grew its EBIT by 413% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Based on what we've seen Centrale d'Achat Française pour l'Outre-Mer Société Anonyme is not finding it easy, given its level of total liabilities, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. When we consider all the elements mentioned above, it seems to us that Centrale d'Achat Française pour l'Outre-Mer Société Anonyme is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Centrale d'Achat Française pour l'Outre-Mer Société Anonyme .

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. 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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