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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Laurent-Perrier S.A. (EPA:LPE) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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.
See our latest analysis for Laurent-Perrier
What Is Laurent-Perrier's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Laurent-Perrier had debt of €356.4m, up from €332.4m in one year. However, it also had €73.5m in cash, and so its net debt is €283.0m.
How Healthy Is Laurent-Perrier's Balance Sheet?
We can see from the most recent balance sheet that Laurent-Perrier had liabilities of €104.5m falling due within a year, and liabilities of €400.0m due beyond that. Offsetting this, it had €73.5m in cash and €57.4m in receivables that were due within 12 months. So its liabilities total €373.6m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of €528.2m, so it does suggest shareholders should keep an eye on Laurent-Perrier's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).