Hugo Boss (ETR:BOSS) Has A Somewhat Strained 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 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. Importantly, Hugo Boss AG (ETR:BOSS) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 €281.0m of debt in September 2020, down from €298.0m, one year before. On the flip side, it has €123.0m in cash leading to net debt of about €158.0m.

How Strong Is Hugo Boss's Balance Sheet?

According to the last reported balance sheet, Hugo Boss had liabilities of €804.0m due within 12 months, and liabilities of €999.0m due beyond 12 months. Offsetting these obligations, it had cash of €123.0m as well as receivables valued at €196.0m due within 12 months. So it has liabilities totalling €1.48b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €1.78b, so it does suggest shareholders should keep an eye on Hugo Boss's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

Given net debt is only 1.3 times EBITDA, it is initially surprising to see that Hugo Boss's EBIT has low interest coverage of 0.30 times. So while we're not necessarily alarmed we think that its debt is far from trivial. Importantly, Hugo Boss's EBIT fell a jaw-dropping 97% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hugo Boss can strengthen its balance sheet over time. 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. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Hugo Boss actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

To be frank both Hugo Boss's interest cover and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Hugo Boss stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. Even though Hugo Boss lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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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