We Think Inter Parfums (NASDAQ:IPAR) Can Stay On Top Of Its Debt

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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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.

See 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 as of March 2023 Inter Parfums had US$192.2m of debt, an increase on US$139.5m, over one year. But on the other hand it also has US$237.8m in cash, leading to a US$45.5m net cash position.

How Strong Is Inter Parfums' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inter Parfums had liabilities of US$362.2m due within 12 months and liabilities of US$168.4m due beyond that. Offsetting these obligations, it had cash of US$237.8m as well as receivables valued at US$269.8m due within 12 months. So it has liabilities totalling US$23.0m 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 while it's hard to imagine that the US$4.31b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Inter Parfums boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Inter Parfums has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Inter Parfums created free cash flow amounting to 5.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about Inter Parfums's liabilities, but we can be reassured by the fact it has has net cash of US$45.5m. And we liked the look of last year's 43% year-on-year EBIT growth. So is Inter Parfums's debt a risk? It doesn't seem so to us. 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 that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.