Hugo Boss (ETR:BOSS) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hugo Boss AG (ETR:BOSS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hugo Boss

What Is Hugo Boss's Debt?

You can click the graphic below for the historical numbers, but it shows that Hugo Boss had €198.3m of debt in December 2021, down from €309.6m, one year before. But on the other hand it also has €284.7m in cash, leading to a €86.4m net cash position.

A Look At Hugo Boss' Liabilities

The latest balance sheet data shows that Hugo Boss had liabilities of €977.8m due within a year, and liabilities of €818.0m falling due after that. Offsetting these obligations, it had cash of €284.7m as well as receivables valued at €266.9m due within 12 months. So it has liabilities totalling €1.24b more than its cash and near-term receivables, combined.

Hugo Boss has a market capitalization of €3.72b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Hugo Boss boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Hugo Boss turned things around in the last 12 months, delivering and EBIT of €230m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hugo Boss'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hugo Boss may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Hugo Boss actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Hugo Boss does have more liabilities than liquid assets, it also has net cash of €86.4m. And it impressed us with free cash flow of €557m, being 242% of its EBIT. So we are not troubled with Hugo Boss's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Hugo Boss, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.