Health Check: How Prudently Does Parrot (EPA:PARRO) Use Debt?

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 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 Parrot S.A. (EPA:PARRO) does use debt in its business. But is this debt a concern to shareholders?

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.

View our latest analysis for Parrot

What Is Parrot's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Parrot had debt of €1.80m, up from €1.17m in one year. However, its balance sheet shows it holds €106.9m in cash, so it actually has €105.1m net cash.

A Look At Parrot's Liabilities

The latest balance sheet data shows that Parrot had liabilities of €36.4m due within a year, and liabilities of €11.8m falling due after that. Offsetting this, it had €106.9m in cash and €22.7m in receivables that were due within 12 months. So it actually has €81.3m more liquid assets than total liabilities.

This surplus strongly suggests that Parrot has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Parrot boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Parrot will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Parrot made a loss at the EBIT level, and saw its revenue drop to €63m, which is a fall of 33%. To be frank that doesn't bode well.

So How Risky Is Parrot?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Parrot had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €28m and booked a €38m accounting loss. But the saving grace is the €105.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Parrot (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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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. 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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