Is SRP Groupe (EPA:SRP) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SRP Groupe S.A. (EPA:SRP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 SRP Groupe

What Is SRP Groupe's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SRP Groupe had €67.3m of debt in December 2021, down from €110.4m, one year before. However, its balance sheet shows it holds €99.6m in cash, so it actually has €32.3m net cash.

A Look At SRP Groupe's Liabilities

Zooming in on the latest balance sheet data, we can see that SRP Groupe had liabilities of €177.2m due within 12 months and liabilities of €54.6m due beyond that. Offsetting this, it had €99.6m in cash and €21.2m in receivables that were due within 12 months. So it has liabilities totalling €111.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €143.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, SRP Groupe boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, SRP Groupe grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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'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. While SRP Groupe has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, SRP Groupe actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although SRP Groupe's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €32.3m. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in €24m. So we don't have any problem with SRP Groupe's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with SRP Groupe (including 1 which 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. 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.