Chocoladefabriken Lindt & Sprüngli (VTX:LISN) Could Easily Take On More Debt

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.' 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. Importantly, Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Chocoladefabriken Lindt & Sprüngli

What Is Chocoladefabriken Lindt & Sprüngli's Debt?

The chart below, which you can click on for greater detail, shows that Chocoladefabriken Lindt & Sprüngli had CHF1.01b in debt in June 2023; about the same as the year before. However, it does have CHF483.8m in cash offsetting this, leading to net debt of about CHF523.0m.

How Healthy Is Chocoladefabriken Lindt & Sprüngli's Balance Sheet?

The latest balance sheet data shows that Chocoladefabriken Lindt & Sprüngli had liabilities of CHF1.21b due within a year, and liabilities of CHF2.04b falling due after that. Offsetting these obligations, it had cash of CHF483.8m as well as receivables valued at CHF562.2m due within 12 months. So its liabilities total CHF2.21b more than the combination of its cash and short-term receivables.

Of course, Chocoladefabriken Lindt & Sprüngli has a titanic market capitalization of CHF24.0b, 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Chocoladefabriken Lindt & Sprüngli has a low net debt to EBITDA ratio of only 0.53. And its EBIT covers its interest expense a whopping 34.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that Chocoladefabriken Lindt & Sprüngli grew its EBIT by 18% 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 Chocoladefabriken Lindt & Sprüngli'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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Chocoladefabriken Lindt & Sprüngli produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Chocoladefabriken Lindt & Sprüngli's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Overall, we don't think Chocoladefabriken Lindt & Sprüngli is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. Over time, share prices tend to follow earnings per share, so if you're interested in Chocoladefabriken Lindt & Sprüngli, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.