Does Chocoladefabriken Lindt & Sprüngli (VTX:LISN) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chocoladefabriken Lindt & Sprüngli

What Is Chocoladefabriken Lindt & Sprüngli's Debt?

As you can see below, at the end of June 2024, Chocoladefabriken Lindt & Sprüngli had CHF1.25b of debt, up from CHF1.01b a year ago. Click the image for more detail. However, because it has a cash reserve of CHF402.3m, its net debt is less, at about CHF848.5m.

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

We can see from the most recent balance sheet that Chocoladefabriken Lindt & Sprüngli had liabilities of CHF1.81b falling due within a year, and liabilities of CHF1.80b due beyond that. On the other hand, it had cash of CHF402.3m and CHF748.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF2.46b.

Given Chocoladefabriken Lindt & Sprüngli has a humongous market capitalization of CHF23.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Chocoladefabriken Lindt & Sprüngli's net debt is only 0.82 times its EBITDA. And its EBIT covers its interest expense a whopping 34.4 times over. So we're pretty relaxed about its super-conservative use of debt. Fortunately, Chocoladefabriken Lindt & Sprüngli grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 net debt to EBITDA is also very heartening. When we consider the range of factors above, it looks like Chocoladefabriken Lindt & Sprüngli is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Chocoladefabriken Lindt & Sprüngli's earnings per share history for free.

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.