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.

In the last year Groupe Pizzorno Environnement's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Groupe Pizzorno Environnement had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost €3.3m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €388k didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. For riskier companies like Groupe Pizzorno Environnement I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.