Parrot (EPA:PARRO) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that Parrot S.A. (EPA:PARRO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Parrot

How Much Debt Does Parrot Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Parrot had debt of €2.49m, up from €1.51m in one year. But on the other hand it also has €88.0m in cash, leading to a €85.5m net cash position.

How Strong Is Parrot's Balance Sheet?

According to the last reported balance sheet, Parrot had liabilities of €35.1m due within 12 months, and liabilities of €10.6m due beyond 12 months. Offsetting this, it had €88.0m in cash and €15.1m in receivables that were due within 12 months. So it actually has €57.3m more liquid assets than total liabilities.

This luscious liquidity implies that Parrot's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Parrot boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Parrot 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.

Over 12 months, Parrot made a loss at the EBIT level, and saw its revenue drop to €57m, which is a fall of 25%. 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 the fact is that over the last twelve months Parrot lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €32m of cash and made a loss of €38m. But the saving grace is the €85.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Parrot I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

When trading Parrot or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.