Is SRP Groupe (EPA:SRP) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, SRP Groupe S.A. (EPA:SRP) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SRP Groupe

What Is SRP Groupe's Net Debt?

As you can see below, SRP Groupe had €36.8m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €46.0m in cash, so it actually has €9.27m net cash.

How Strong Is SRP Groupe's Balance Sheet?

The latest balance sheet data shows that SRP Groupe had liabilities of €208.8m due within a year, and liabilities of €31.4m falling due after that. Offsetting this, it had €46.0m in cash and €25.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €168.6m.

The deficiency here weighs heavily on the €86.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, SRP Groupe would likely require a major re-capitalisation if it had to pay its creditors today. Given that SRP Groupe 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SRP Groupe 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.

Over 12 months, SRP Groupe made a loss at the EBIT level, and saw its revenue drop to €646m, which is a fall of 4.5%. We would much prefer see growth.

So How Risky Is SRP Groupe?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months SRP Groupe lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €8.6m of cash and made a loss of €40m. But the saving grace is the €9.27m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - SRP Groupe has 2 warning signs we think you should be aware of.

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. 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.