We Think Fnac Darty (EPA:FNAC) Can Stay On Top Of Its Debt

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. As with many other companies Fnac Darty SA (EPA:FNAC) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fnac Darty

How Much Debt Does Fnac Darty Carry?

As you can see below, Fnac Darty had €934.0m of debt at December 2021, down from €1.45b a year prior. However, it does have €1.19b in cash offsetting this, leading to net cash of €256.0m.

How Healthy Is Fnac Darty's Balance Sheet?

The latest balance sheet data shows that Fnac Darty had liabilities of €3.14b due within a year, and liabilities of €2.26b falling due after that. Offsetting this, it had €1.19b in cash and €305.0m in receivables that were due within 12 months. So its liabilities total €3.90b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €1.24b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Fnac Darty would probably need a major re-capitalization if its creditors were to demand repayment. Given that Fnac Darty has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Another good sign is that Fnac Darty has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fnac Darty 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fnac Darty 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, Fnac Darty actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Fnac Darty's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €256.0m. The cherry on top was that in converted 147% of that EBIT to free cash flow, bringing in €353m. So we don't have any problem with Fnac Darty's use of debt. 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. Be aware that Fnac Darty is showing 2 warning signs in our investment analysis , you should know about...

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.