These 4 Measures Indicate That Inter Parfums (NASDAQ:IPAR) Is Using Debt Safely

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 Inter Parfums, Inc. (NASDAQ:IPAR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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 2021, Inter Parfums had US$141.7m of debt, up from US$25.1m a year ago. Click the image for more detail. But on the other hand it also has US$324.0m in cash, leading to a US$182.4m net cash position.

How Healthy Is Inter Parfums' Balance Sheet?

According to the last reported balance sheet, Inter Parfums had liabilities of US$212.3m due within 12 months, and liabilities of US$154.4m due beyond 12 months. On the other hand, it had cash of US$324.0m and US$199.3m worth of receivables due within a year. So it actually has US$156.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Inter Parfums could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Inter Parfums boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Inter Parfums grew its EBIT by 238% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Inter Parfums can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Inter Parfums recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Inter Parfums has US$182.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 238% over the last year. So is Inter Parfums's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Inter Parfums , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.