These 4 Measures Indicate That SRP Groupe (EPA:SRP) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that SRP Groupe S.A. (EPA:SRP) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SRP Groupe

How Much Debt Does SRP Groupe Carry?

The image below, which you can click on for greater detail, shows that SRP Groupe had debt of €63.6m at the end of June 2021, a reduction from €99.9m over a year. But it also has €108.8m in cash to offset that, meaning it has €45.2m net cash.

How Healthy Is SRP Groupe's Balance Sheet?

We can see from the most recent balance sheet that SRP Groupe had liabilities of €177.7m falling due within a year, and liabilities of €74.3m due beyond that. Offsetting these obligations, it had cash of €108.8m as well as receivables valued at €31.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €111.3m.

SRP Groupe has a market capitalization of €251.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, SRP Groupe also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, SRP Groupe turned things around in the last 12 months, delivering and EBIT of €50m. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent year, SRP Groupe recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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 €45.2m. So we don't have any problem with SRP Groupe's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for SRP Groupe (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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