These 4 Measures Indicate That Expro Group Holdings (NYSE:XPRO) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Expro Group Holdings N.V. (NYSE:XPRO) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Expro Group Holdings

How Much Debt Does Expro Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Expro Group Holdings had debt of US$50.0m, up from none in one year. However, it does have US$255.3m in cash offsetting this, leading to net cash of US$205.3m.

How Healthy Is Expro Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Expro Group Holdings had liabilities of US$447.1m falling due within a year, and liabilities of US$252.8m due beyond that. Offsetting this, it had US$255.3m in cash and US$439.2m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Expro Group Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.83b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Expro Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Expro Group Holdings turned things around in the last 12 months, delivering and EBIT of US$55m. 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 Expro Group Holdings'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. Expro Group Holdings 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. Happily for any shareholders, Expro Group Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Expro Group Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$205.3m. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in US$83m. So is Expro Group Holdings's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Expro Group Holdings that you should be aware of.

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. 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.