Is Inter Parfums (NASDAQ:IPAR) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Inter Parfums, Inc. (NASDAQ:IPAR) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Inter Parfums

How Much Debt Does Inter Parfums Carry?

As you can see below, at the end of September 2023, Inter Parfums had US$175.3m of debt, up from US$120.5m a year ago. Click the image for more detail. But it also has US$183.5m in cash to offset that, meaning it has US$8.26m net cash.

A Look At Inter Parfums' Liabilities

The latest balance sheet data shows that Inter Parfums had liabilities of US$363.1m due within a year, and liabilities of US$154.4m falling due after that. On the other hand, it had cash of US$183.5m and US$302.2m worth of receivables due within a year. So it has liabilities totalling US$31.8m more than its cash and near-term receivables, combined.

Having regard to Inter Parfums' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.86b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Inter Parfums also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Inter Parfums has boosted its EBIT by 66%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Inter Parfums can strengthen its balance sheet over time. 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. Inter Parfums 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. In the last three years, Inter Parfums created free cash flow amounting to 8.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Inter Parfums has US$8.26m in net cash. And we liked the look of last year's 66% year-on-year EBIT growth. So we don't think Inter Parfums's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Inter Parfums you should know about.

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.