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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Chocoladefabriken Lindt & Sprüngli

What Is Chocoladefabriken Lindt & Sprüngli's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Chocoladefabriken Lindt & Sprüngli had CHF1.25b of debt, an increase on CHF1.01b, over one year. On the flip side, it has CHF402.3m in cash leading to net debt of about CHF848.5m.

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

The latest balance sheet data shows that Chocoladefabriken Lindt & Sprüngli had liabilities of CHF1.81b due within a year, and liabilities of CHF1.80b falling due after that. Offsetting these obligations, it had cash of CHF402.3m as well as receivables valued at CHF748.2m due within 12 months. 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 CHF26.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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 has a low net debt to EBITDA ratio of only 0.82. And its EBIT covers its interest expense a whopping 34.4 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that Chocoladefabriken Lindt & Sprüngli has increased its EBIT by 4.9% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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, 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. Over the most recent three years, Chocoladefabriken Lindt & Sprüngli recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Chocoladefabriken Lindt & Sprüngli's impressive interest cover implies it has the upper hand on its debt. 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. While that brings some risk, it can also enhance returns for shareholders. 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.

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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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.