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. We can see that Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Chocoladefabriken Lindt & Sprüngli's Debt?
As you can see below, Chocoladefabriken Lindt & Sprüngli had CHF1.00b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CHF1.25b in cash, so it actually has CHF248.8m net cash.
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 CHF1.28b falling due within a year, and liabilities of CHF2.16b due beyond that. Offsetting these obligations, it had cash of CHF1.25b as well as receivables valued at CHF978.8m due within 12 months. So it has liabilities totalling CHF1.22b more than its cash and near-term receivables, combined.
Of course, Chocoladefabriken Lindt & Sprüngli has a titanic market capitalization of CHF19.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Chocoladefabriken Lindt & Sprüngli boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Chocoladefabriken Lindt & Sprüngli's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Chocoladefabriken Lindt & Sprüngli recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Chocoladefabriken Lindt & Sprüngli has CHF248.8m in net cash. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in CHF539m. So we are not troubled with Chocoladefabriken Lindt & Sprüngli's debt use. 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.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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