Compagnie Financière Richemont (VTX:CFR) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Compagnie Financière Richemont SA (VTX:CFR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Compagnie Financière Richemont

What Is Compagnie Financière Richemont's Net Debt?

The chart below, which you can click on for greater detail, shows that Compagnie Financière Richemont had €12.0b in debt in September 2023; about the same as the year before. But it also has €17.8b in cash to offset that, meaning it has €5.79b net cash.

How Strong Is Compagnie Financière Richemont's Balance Sheet?

We can see from the most recent balance sheet that Compagnie Financière Richemont had liabilities of €12.2b falling due within a year, and liabilities of €9.74b due beyond that. Offsetting this, it had €17.8b in cash and €1.94b in receivables that were due within 12 months. So its liabilities total €2.14b more than the combination of its cash and short-term receivables.

Of course, Compagnie Financière Richemont has a titanic market capitalization of €66.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Compagnie Financière Richemont also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Compagnie Financière Richemont grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Compagnie Financière Richemont's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Compagnie Financière Richemont may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Compagnie Financière Richemont generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Compagnie Financière Richemont has €5.79b in net cash. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in €3.6b. So is Compagnie Financière Richemont's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Compagnie Financière Richemont you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.