Is Compagnie Financière Richemont (VTX:CFR) A Risky Investment?

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. Importantly, Compagnie Financière Richemont SA (VTX:CFR) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 Compagnie Financière Richemont

What Is Compagnie Financière Richemont's Debt?

The chart below, which you can click on for greater detail, shows that Compagnie Financière Richemont had €12.0b in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds €19.5b in cash, so it actually has €7.45b net cash.

How Healthy Is Compagnie Financière Richemont's Balance Sheet?

The latest balance sheet data shows that Compagnie Financière Richemont had liabilities of €11.8b due within a year, and liabilities of €10.3b falling due after that. Offsetting this, it had €19.5b in cash and €1.91b in receivables that were due within 12 months. So it has liabilities totalling €642.0m more than its cash and near-term receivables, combined.

Having regard to Compagnie Financière Richemont's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €83.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Compagnie Financière Richemont boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Compagnie Financière Richemont saw its EBIT decline by 4.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Compagnie Financière Richemont 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, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Compagnie Financière Richemont produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €7.45b. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in €3.7b. 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.

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.