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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. As with many other companies. Inter Parfums, Inc. (NASDAQ:IPAR) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Inter Parfums’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Inter Parfums had US$39.6m of debt in March 2019, down from US$56.0m, one year before However, its balance sheet shows it holds US$228.2m in cash, so it actually has US$188.7m net cash.
How Strong Is Inter Parfums’s Balance Sheet?
We can see from the most recent balance sheet that Inter Parfums had liabilities of US$183.8m falling due within a year, and liabilities of US$44.9m due beyond that. On the other hand, it had cash of US$228.2m and US$168.9m worth of receivables due within a year. So it can boast US$168.4m more liquid assets than total liabilities.
This surplus suggests that Inter Parfums has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Inter Parfums boasts net cash, so it’s fair to say it does not have a heavy debt load!
Also good is that Inter Parfums grew its EBIT at 15% over the last year, further increasing its ability to manage debt. 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 Inter Parfums’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. While Inter Parfums 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. Over the most recent three years, Inter Parfums recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company’s debt, in this case Inter Parfums has US$189m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 15% over the last year. So we don’t think Inter Parfums’s use of debt is risky. Another factor that would give us confidence in Inter Parfums would be if insiders have been buying shares: if you’re conscious of that signal too, you can find out instantly by clicking this link.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.