These 4 Measures Indicate That Chocoladefabriken Lindt & Sprüngli (VTX:LISN) Is Using Debt Safely

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.' 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. We note that Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chocoladefabriken Lindt & Sprüngli

What Is Chocoladefabriken Lindt & Sprüngli's Debt?

The chart below, which you can click on for greater detail, shows that Chocoladefabriken Lindt & Sprüngli had CHF1.01b in debt in June 2022; about the same as the year before. However, it also had CHF794.3m in cash, and so its net debt is CHF212.4m.

How Healthy 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 CHF1.26b due within 12 months and liabilities of CHF2.05b due beyond 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.

Since publicly traded Chocoladefabriken Lindt & Sprüngli shares are worth a very impressive total of CHF24.7b, it seems unlikely that this level of liabilities would be a major threat. 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 0.24 times its EBITDA. And its EBIT covers its interest expense a whopping 30.4 times over. 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. 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. 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 89% of its EBIT, which is stronger than we'd usually 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 the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! 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. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.