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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Guillemot Corporation S.A. (EPA:GUI) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Guillemot
What Is Guillemot's Debt?
As you can see below, Guillemot had €11.9m of debt, at December 2018, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €35.3m in cash, so it actually has €23.4m net cash.
A Look At Guillemot's Liabilities
According to the last reported balance sheet, Guillemot had liabilities of €39.3m due within 12 months, and liabilities of €3.53m due beyond 12 months. On the other hand, it had cash of €35.3m and €24.8m worth of receivables due within a year. So it can boast €17.2m more liquid assets than total liabilities.
This surplus strongly suggests that Guillemot has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Guillemot has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Guillemot has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guillemot can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.