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.' 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. As with many other companies Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at 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 December 2022; about the same as the year before. On the flip side, it has CHF864.9m in cash leading to net debt of about CHF141.2m.

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

According to the last reported balance sheet, Chocoladefabriken Lindt & Sprüngli had liabilities of CHF1.58b due within 12 months, and liabilities of CHF1.97b due beyond 12 months. Offsetting this, it had CHF864.9m in cash and CHF1.11b in receivables that were due within 12 months. So its liabilities total CHF1.57b more than the combination of its cash and short-term receivables.

Of course, Chocoladefabriken Lindt & Sprüngli has a titanic market capitalization of CHF25.9b, 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. Carrying virtually no net debt, Chocoladefabriken Lindt & Sprüngli has a very light debt load indeed.

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's net debt is only 0.15 times its EBITDA. And its EBIT covers its interest expense a whopping 27.7 times over. So we're pretty relaxed about its super-conservative use of debt. And we also note warmly that Chocoladefabriken Lindt & Sprüngli grew its EBIT by 16% last year, making its debt load easier 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 Chocoladefabriken Lindt & Sprüngli can strengthen its balance sheet over time. 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 always check how much of that EBIT is translated into free cash flow. Over the last three years, Chocoladefabriken Lindt & Sprüngli recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Chocoladefabriken Lindt & Sprüngli's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. 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 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.