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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Groupe Pizzorno Environnement (EPA:GPE) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Groupe Pizzorno Environnement
How Much Debt Does Groupe Pizzorno Environnement Carry?
The image below, which you can click on for greater detail, shows that Groupe Pizzorno Environnement had debt of €74.8m at the end of December 2018, a reduction from €100.7m over a year. On the flip side, it has €54.5m in cash leading to net debt of about €20.3m.
How Strong Is Groupe Pizzorno Environnement's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Groupe Pizzorno Environnement had liabilities of €131.4m due within 12 months and liabilities of €79.3m due beyond that. Offsetting this, it had €54.5m in cash and €76.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €79.5m.
When you consider that this deficiency exceeds the company's €55.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Groupe Pizzorno Environnement 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.