Is Esprinet (BIT:PRT) A Risky Investment?

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. We can see that Esprinet S.p.A. (BIT:PRT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Esprinet

What Is Esprinet's Net Debt?

The image below, which you can click on for greater detail, shows that Esprinet had debt of €180.9m at the end of March 2022, a reduction from €200.3m over a year. However, its balance sheet shows it holds €188.8m in cash, so it actually has €7.87m net cash.

A Look At Esprinet's Liabilities

We can see from the most recent balance sheet that Esprinet had liabilities of €1.12b falling due within a year, and liabilities of €224.5m due beyond that. Offsetting this, it had €188.8m in cash and €591.4m in receivables that were due within 12 months. So its liabilities total €567.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €364.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Esprinet would probably need a major re-capitalization if its creditors were to demand repayment. Given that Esprinet has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

And we also note warmly that Esprinet grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Esprinet's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Esprinet 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, Esprinet 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

Although Esprinet's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €7.87m. The cherry on top was that in converted 196% of that EBIT to free cash flow, bringing in €51m. So we don't have any problem with Esprinet's use of debt. 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. For instance, we've identified 2 warning signs for Esprinet that you should be aware of.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.