Chocoladefabriken Lindt & Sprüngli (VTX:LISN) 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.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Chocoladefabriken Lindt & Sprüngli

How Much Debt Does Chocoladefabriken Lindt & Sprüngli Carry?

As you can see below, Chocoladefabriken Lindt & Sprüngli had CHF1.01b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CHF794.3m, its net debt is less, at about CHF212.4m.

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

The latest balance sheet data shows that Chocoladefabriken Lindt & Sprüngli had liabilities of CHF1.26b due within a year, and liabilities of CHF2.05b falling due after that. Offsetting this, it had CHF794.3m in cash and CHF560.3m in receivables that were due within 12 months. So its liabilities total CHF1.96b more than the combination of its cash and short-term receivables.

Given Chocoladefabriken Lindt & Sprüngli has a humongous market capitalization of CHF23.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Chocoladefabriken Lindt & Sprüngli has virtually no net debt, so it's fair to say it does not have a heavy debt load!

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 0.24 times its EBITDA. And its EBIT easily covers its interest expense, being 30.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also positive, Chocoladefabriken Lindt & Sprüngli grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chocoladefabriken Lindt & Sprüngli 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Chocoladefabriken Lindt & Sprüngli generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Chocoladefabriken Lindt & Sprüngli's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. 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 we're not worried about the use of a little leverage on the balance sheet. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.