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. As with many other companies Piscines Desjoyaux SA (EPA:ALPDX) makes use of debt. But should shareholders be worried about its use of debt?
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. 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. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Piscines Desjoyaux's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Piscines Desjoyaux had €13.9m of debt in August 2019, down from €17.0m, one year before. But it also has €27.5m in cash to offset that, meaning it has €13.6m net cash.
How Healthy Is Piscines Desjoyaux's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Piscines Desjoyaux had liabilities of €25.7m due within 12 months and liabilities of €10.5m due beyond that. On the other hand, it had cash of €27.5m and €10.0m worth of receivables due within a year. So it actually has €1.32m more liquid assets than total liabilities.
Having regard to Piscines Desjoyaux's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €101.4m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Piscines Desjoyaux 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 Piscines Desjoyaux has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Piscines Desjoyaux will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Piscines Desjoyaux 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. Over the last three years, Piscines Desjoyaux recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to investigate a company's debt, in this case Piscines Desjoyaux has €13.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in €15m. So we don't think Piscines Desjoyaux's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Piscines Desjoyaux , and understanding them should be part of your investment process.
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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