We Think Chocoladefabriken Lindt & Sprüngli (VTX:LISN) Can Manage Its Debt With Ease

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.' 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 note that Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Chocoladefabriken Lindt & Sprüngli Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Chocoladefabriken Lindt & Sprüngli had debt of CHF1.19b, up from CHF1.01b in one year. On the flip side, it has CHF1.02b in cash leading to net debt of about CHF179.1m.

A Look At Chocoladefabriken Lindt & Sprüngli's Liabilities

Zooming in on the latest balance sheet data, we can see that Chocoladefabriken Lindt & Sprüngli had liabilities of CHF2.01b due within 12 months and liabilities of CHF2.31b due beyond that. On the other hand, it had cash of CHF1.02b and CHF1.35b worth of receivables due within a year. So its liabilities total CHF1.95b more than the combination of its cash and short-term receivables.

Of course, Chocoladefabriken Lindt & Sprüngli has a titanic market capitalization of CHF26.7b, 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. Carrying virtually no net debt, Chocoladefabriken Lindt & Sprüngli has a very light debt load indeed.

See our latest analysis for Chocoladefabriken Lindt & Sprüngli

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Chocoladefabriken Lindt & Sprüngli's net debt is only 0.17 times its EBITDA. And its EBIT covers its interest expense a whopping 27.5 times over. So we're pretty relaxed about its super-conservative use of debt. Fortunately, Chocoladefabriken Lindt & Sprüngli grew its EBIT by 9.7% in the last year, making that debt load look even more manageable. 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, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Chocoladefabriken Lindt & Sprüngli recorded free cash flow worth 75% 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

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 net debt to EBITDA also supports that impression! Zooming out, Chocoladefabriken Lindt & Sprüngli seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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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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.