Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Groupe Open (EPA:OPN) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Groupe Open's Debt?
You can click the graphic below for the historical numbers, but it shows that Groupe Open had €12.4m of debt in June 2020, down from €19.2m, one year before. However, its balance sheet shows it holds €31.7m in cash, so it actually has €19.3m net cash.
How Healthy Is Groupe Open's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Groupe Open had liabilities of €107.7m due within 12 months and liabilities of €33.7m due beyond that. Offsetting this, it had €31.7m in cash and €72.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €37.1m.
While this might seem like a lot, it is not so bad since Groupe Open has a market capitalization of €120.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Groupe Open boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Groupe Open's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Groupe Open's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Groupe Open 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. During the last three years, Groupe Open generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While Groupe Open does have more liabilities than liquid assets, it also has net cash of €19.3m. And it impressed us with free cash flow of €23m, being 91% of its EBIT. So we are not troubled with Groupe Open's debt use. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Groupe Open you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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