These 4 Measures Indicate That Esprinet (BIT:PRT) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Esprinet S.p.A. (BIT:PRT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does Esprinet Carry?

As you can see below, Esprinet had €157.8m of debt at September 2020, down from €169.8m a year prior. However, it does have €234.8m in cash offsetting this, leading to net cash of €77.0m.

How Healthy Is Esprinet's Balance Sheet?

According to the last reported balance sheet, Esprinet had liabilities of €847.9m due within 12 months, and liabilities of €198.2m due beyond 12 months. Offsetting this, it had €234.8m in cash and €464.5m in receivables that were due within 12 months. So it has liabilities totalling €346.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €451.8m, so it does suggest shareholders should keep an eye on Esprinet's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Esprinet boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Esprinet grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Esprinet has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Esprinet actually produced more free cash flow than EBIT over the last three years. 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 €77.0m. And it impressed us with free cash flow of €189m, being 189% of its EBIT. So we are not troubled with Esprinet's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Esprinet .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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