We Think Compagnie Financière Richemont (VTX:CFR) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Compagnie Financière Richemont had €11.8b of debt, an increase on €11.3b, over one year. However, its balance sheet shows it holds €18.3b in cash, so it actually has €6.55b net cash.

A Look At Compagnie Financière Richemont's Liabilities

We can see from the most recent balance sheet that Compagnie Financière Richemont had liabilities of €12.3b falling due within a year, and liabilities of €9.56b due beyond that. Offsetting these obligations, it had cash of €18.3b as well as receivables valued at €1.51b due within 12 months. So its liabilities total €2.02b more than the combination of its cash and short-term receivables.

Of course, Compagnie Financière Richemont has a titanic market capitalization of €79.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On top of that, Compagnie Financière Richemont grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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. During the last three years, Compagnie Financière Richemont generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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 €6.55b. And it impressed us with free cash flow of €3.5b, being 96% of its EBIT. So is Compagnie Financière Richemont's debt a risk? It doesn't seem so to us. 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.