Here's Why Guillemot (EPA:GUI) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Guillemot Corporation S.A. (EPA:GUI) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Guillemot

What Is Guillemot's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Guillemot had €13.1m of debt, an increase on €12.6m, over one year. However, it does have €45.2m in cash offsetting this, leading to net cash of €32.1m.

How Healthy Is Guillemot's Balance Sheet?

We can see from the most recent balance sheet that Guillemot had liabilities of €35.2m falling due within a year, and liabilities of €9.27m due beyond that. Offsetting this, it had €45.2m in cash and €22.0m in receivables that were due within 12 months. So it can boast €22.8m more liquid assets than total liabilities.

This surplus suggests that Guillemot is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Guillemot boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Guillemot's saving grace is its low debt levels, because its EBIT has tanked 20% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guillemot 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 company can only pay off debt with cold hard cash, not accounting profits. 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 three years, Guillemot recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Guillemot has €32.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €11m, being 86% of its EBIT. So we don't have any problem with Guillemot's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Guillemot you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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