Does Compagnie Générale des Établissements Michelin Société en commandite par actions (EPA:ML) Have A Healthy Balance Sheet?

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.' 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. Importantly, Compagnie Générale des Établissements Michelin Société en commandite par actions (EPA:ML) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Compagnie Générale des Établissements Michelin Société en commandite par actions Carry?

As you can see below, Compagnie Générale des Établissements Michelin Société en commandite par actions had €6.49b of debt at June 2025, down from €6.79b a year prior. However, it does have €3.12b in cash offsetting this, leading to net debt of about €3.37b.

A Look At Compagnie Générale des Établissements Michelin Société en commandite par actions' Liabilities

According to the last reported balance sheet, Compagnie Générale des Établissements Michelin Société en commandite par actions had liabilities of €8.19b due within 12 months, and liabilities of €9.63b due beyond 12 months. Offsetting this, it had €3.12b in cash and €4.03b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.7b.

While this might seem like a lot, it is not so bad since Compagnie Générale des Établissements Michelin Société en commandite par actions has a huge market capitalization of €22.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

Check out our latest analysis for Compagnie Générale des Établissements Michelin Société en commandite par actions

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).

Compagnie Générale des Établissements Michelin Société en commandite par actions has a low net debt to EBITDA ratio of only 0.73. And its EBIT easily covers its interest expense, being 23.2 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the bad news is that Compagnie Générale des Établissements Michelin Société en commandite par actions has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Compagnie Générale des Établissements Michelin Société en commandite par actions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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, Compagnie Générale des Établissements Michelin Société en commandite par actions recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

On our analysis Compagnie Générale des Établissements Michelin Société en commandite par actions's interest cover should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. To be specific, it seems about as good at (not) growing its EBIT as wet socks are at keeping your feet warm. When we consider all the factors mentioned above, we do feel a bit cautious about Compagnie Générale des Établissements Michelin Société en commandite par actions's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Compagnie Générale des Établissements Michelin Société en commandite par actions you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.