Chocoladefabriken Lindt & Sprüngli (VTX:LISN) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Chocoladefabriken Lindt & Sprüngli

How Much Debt Does Chocoladefabriken Lindt & Sprüngli Carry?

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. On the flip side, it has CHF483.8m in cash leading to net debt of about CHF523.0m.

How Strong 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 this, it had CHF483.8m in cash and CHF562.2m in receivables that were due within 12 months. So it has liabilities totalling CHF2.21b more than its cash and near-term receivables, combined.

Since publicly traded Chocoladefabriken Lindt & Sprüngli shares are worth a very impressive total of CHF24.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Chocoladefabriken Lindt & Sprüngli's net debt is only 0.53 times its EBITDA. And its EBIT covers its interest expense a whopping 31.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that Chocoladefabriken Lindt & Sprüngli grew its EBIT at 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Chocoladefabriken Lindt & Sprüngli recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Chocoladefabriken Lindt & Sprüngli's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Considering this range of factors, it seems to us that Chocoladefabriken Lindt & Sprüngli is quite prudent with its debt, and the risks seem well managed. 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.

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.