Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Christian Dior SE (EPA:CDI) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Our analysis indicates that CDI is potentially undervalued!
How Much Debt Does Christian Dior Carry?
The image below, which you can click on for greater detail, shows that Christian Dior had debt of €21.7b at the end of June 2022, a reduction from €24.1b over a year. However, because it has a cash reserve of €10.7b, its net debt is less, at about €11.0b.
How Strong Is Christian Dior's Balance Sheet?
According to the last reported balance sheet, Christian Dior had liabilities of €32.0b due within 12 months, and liabilities of €46.2b due beyond 12 months. On the other hand, it had cash of €10.7b and €6.64b worth of receivables due within a year. So it has liabilities totalling €60.9b more than its cash and near-term receivables, combined.
Christian Dior has a very large market capitalization of €123.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
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.
Christian Dior's net debt is only 0.52 times its EBITDA. And its EBIT covers its interest expense a whopping 104 times over. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Christian Dior has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Christian Dior's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Christian Dior recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
The good news is that Christian Dior's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its level of total liabilities. Looking at the bigger picture, we think Christian Dior's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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 Christian Dior'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.
Christian Dior SE, through its subsidiaries, engages in the production, distribution, and retail of fashion and leather goods, wines and spirits, perfumes and cosmetics, and watches and jewelry worldwide.
Outstanding track record with adequate balance sheet.