Compagnie Financière Richemont (VTX:CFR) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Compagnie Financière Richemont SA (VTX:CFR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Compagnie Financière Richemont

What Is Compagnie Financière Richemont's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Compagnie Financière Richemont had €11.3b of debt, an increase on €10.0b, over one year. But it also has €16.5b in cash to offset that, meaning it has €5.25b net cash.

A Look At Compagnie Financière Richemont's Liabilities

Zooming in on the latest balance sheet data, we can see that Compagnie Financière Richemont had liabilities of €10.5b due within 12 months and liabilities of €9.62b due beyond that. On the other hand, it had cash of €16.5b and €1.22b worth of receivables due within a year. So it has liabilities totalling €2.40b more than its cash and near-term receivables, combined.

Given Compagnie Financière Richemont has a humongous market capitalization of €55.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Compagnie Financière Richemont boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Compagnie Financière Richemont grew its EBIT by 130% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Compagnie Financière Richemont 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Compagnie Financière Richemont actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Compagnie Financière Richemont's liabilities, but we can be reassured by the fact it has has net cash of €5.25b. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in €3.8b. So we don't think Compagnie Financière Richemont's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Compagnie Financière Richemont that you should be aware of before investing here.

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.

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.