Does LVMH Moët Hennessy - Louis Vuitton Société Européenne (EPA:MC) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for LVMH Moët Hennessy - Louis Vuitton Société Européenne

What Is LVMH Moët Hennessy - Louis Vuitton Société Européenne's Debt?

As you can see below, at the end of December 2023, LVMH Moët Hennessy - Louis Vuitton Société Européenne had €22.0b of debt, up from €19.9b a year ago. Click the image for more detail. However, it does have €11.3b in cash offsetting this, leading to net debt of about €10.7b.

How Strong Is LVMH Moët Hennessy - Louis Vuitton Société Européenne's Balance Sheet?

According to the last reported balance sheet, LVMH Moët Hennessy - Louis Vuitton Société Européenne had liabilities of €33.1b due within 12 months, and liabilities of €47.8b due beyond 12 months. On the other hand, it had cash of €11.3b and €7.95b worth of receivables due within a year. So its liabilities total €61.8b more than the combination of its cash and short-term receivables.

Of course, LVMH Moët Hennessy - Louis Vuitton Société Européenne has a titanic market capitalization of €401.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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).

LVMH Moët Hennessy - Louis Vuitton Société Européenne has a low net debt to EBITDA ratio of only 0.43. And its EBIT covers its interest expense a whopping 30.1 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, LVMH Moët Hennessy - Louis Vuitton Société Européenne grew its EBIT by 8.4% 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 ultimately the future profitability of the business will decide if LVMH Moët Hennessy - Louis Vuitton Société Européenne 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, LVMH Moët Hennessy - Louis Vuitton Société Européenne recorded free cash flow worth 64% 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

Happily, LVMH Moët Hennessy - Louis Vuitton Société Européenne's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Zooming out, LVMH Moët Hennessy - Louis Vuitton Société Européenne seems to use debt quite reasonably; and that gets the nod from us. 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 LVMH Moët Hennessy - Louis Vuitton Société Européenne's earnings per share history for free.

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.