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. 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. As with many other companies Groupe Open (EPA:OPN) makes use of debt. But the real question is whether this debt is making the company risky.
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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Groupe Open's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Groupe Open had €19.2m of debt in June 2019, down from €20.1m, one year before. However, its balance sheet shows it holds €23.9m in cash, so it actually has €4.70m net cash.
How Strong Is Groupe Open's Balance Sheet?
The latest balance sheet data shows that Groupe Open had liabilities of €101.4m due within a year, and liabilities of €39.6m falling due after that. On the other hand, it had cash of €23.9m and €72.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €44.9m.
While this might seem like a lot, it is not so bad since Groupe Open has a market capitalization of €97.1m, 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. While it does have liabilities worth noting, Groupe Open also has more cash than debt, so we're pretty confident it can manage its debt safely.
In fact Groupe Open's saving grace is its low debt levels, because its EBIT has tanked 28% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Groupe Open 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. 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 produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Although Groupe Open's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €4.70m. So we don't have any problem with Groupe Open's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Groupe Open .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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