Guillemot (EPA:GUI) Seems To Use Debt Rather Sparingly

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. Importantly, Guillemot Corporation S.A. (EPA:GUI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Guillemot

How Much Debt Does Guillemot Carry?

As you can see below, Guillemot had €10.9m of debt at December 2020, down from €16.0m a year prior. However, its balance sheet shows it holds €64.0m in cash, so it actually has €53.1m net cash.

How Strong Is Guillemot's Balance Sheet?

We can see from the most recent balance sheet that Guillemot had liabilities of €54.1m falling due within a year, and liabilities of €7.40m due beyond that. Offsetting this, it had €64.0m in cash and €32.3m in receivables that were due within 12 months. So it can boast €34.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Guillemot could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Guillemot boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Guillemot made a loss at the EBIT level, last year, it was also good to see that it generated €23m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guillemot will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Guillemot 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. Over the last year, Guillemot actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Guillemot has €53.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €28m, being 123% of its EBIT. So we don't think Guillemot's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Guillemot you should know about.

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.

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