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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Inter Parfums Carry?
The image below, which you can click on for greater detail, shows that Inter Parfums had debt of US$35.4m at the end of June 2019, a reduction from US$58.1m over a year. But on the other hand it also has US$213.7m in cash, leading to a US$178.3m net cash position.
A Look At Inter Parfums's Liabilities
Zooming in on the latest balance sheet data, we can see that Inter Parfums had liabilities of US$178.6m due within 12 months and liabilities of US$41.8m due beyond that. Offsetting this, it had US$213.7m in cash and US$150.8m in receivables that were due within 12 months. So it actually has US$144.1m more liquid assets than total liabilities.
This surplus suggests that Inter Parfums has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Inter Parfums has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that Inter Parfums grew its EBIT by 13% last year, making its debt load easier to handle. 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'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. 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. Over the most recent three years, Inter Parfums recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Inter Parfums has US$178m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't think Inter Parfums's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Inter Parfums insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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