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 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 Expro Group Holdings N.V. (NYSE:XPRO) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Expro Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Expro Group Holdings had debt of US$121.1m, up from none in one year. But it also has US$133.5m in cash to offset that, meaning it has US$12.4m net cash.

How Strong Is Expro Group Holdings' Balance Sheet?

The latest balance sheet data shows that Expro Group Holdings had liabilities of US$499.9m due within a year, and liabilities of US$357.5m falling due after that. Offsetting these obligations, it had cash of US$133.5m as well as receivables valued at US$564.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$159.9m.

Of course, Expro Group Holdings has a market capitalization of US$2.41b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Expro Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Expro Group Holdings grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Expro Group Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Expro Group Holdings 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. In the last two years, Expro Group Holdings created free cash flow amounting to 6.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Expro Group Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$12.4m. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't have any problem with Expro Group Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Expro Group Holdings .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.