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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Inter Parfums, Inc. (NASDAQ:IPAR) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Inter Parfums

What Is Inter Parfums's Debt?

You can click the graphic below for the historical numbers, but it shows that Inter Parfums had US$120.5m of debt in September 2022, down from US$141.7m, one year before. However, it does have US$176.7m in cash offsetting this, leading to net cash of US$56.2m.

How Healthy Is Inter Parfums' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inter Parfums had liabilities of US$248.5m due within 12 months and liabilities of US$132.5m due beyond that. Offsetting this, it had US$176.7m in cash and US$228.4m in receivables that were due within 12 months. So it actually has US$24.0m more liquid assets than total liabilities.

This state of affairs indicates that Inter Parfums' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$3.78b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Inter Parfums boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Inter Parfums has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 13% 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 we empathize with investors who find debt concerning, you should keep in mind that Inter Parfums has net cash of US$56.2m, as well as more liquid assets than liabilities. So we don't have any problem with Inter Parfums's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Inter Parfums (1 is significant!) that you should be aware of before investing here.

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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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.