Is Chocoladefabriken Lindt & Sprüngli (VTX:LISN) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chocoladefabriken Lindt & Sprüngli

How Much Debt Does Chocoladefabriken Lindt & Sprüngli Carry?

As you can see below, Chocoladefabriken Lindt & Sprüngli had CHF1.03b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CHF1.20b in cash, leading to a CHF170.4m net cash position.

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

Zooming in on the latest balance sheet data, we can see that Chocoladefabriken Lindt & Sprüngli had liabilities of CHF1.15b due within 12 months and liabilities of CHF2.24b due beyond that. Offsetting this, it had CHF1.20b in cash and CHF565.3m in receivables that were due within 12 months. So its liabilities total CHF1.63b more than the combination of its cash and short-term receivables.

Of course, Chocoladefabriken Lindt & Sprüngli has a titanic market capitalization of CHF26.3b, 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. Despite its noteworthy liabilities, Chocoladefabriken Lindt & Sprüngli boasts net cash, so it's fair to say it does not have a heavy debt load!

Chocoladefabriken Lindt & Sprüngli's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chocoladefabriken Lindt & Sprüngli has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Chocoladefabriken Lindt & Sprüngli generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Chocoladefabriken Lindt & Sprüngli has CHF170.4m in net cash. And it impressed us with free cash flow of CHF578m, being 87% of its EBIT. So is Chocoladefabriken Lindt & Sprüngli's debt a risk? It doesn't seem so 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.

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.

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