Does LVMH Moët Hennessy - Louis Vuitton Société Européenne (EPA:MC) 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.' 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 note that LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first step when considering a company's debt levels is to consider its 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, because it has a cash reserve of €11.3b, its net debt is less, at about €10.7b.

A Look At LVMH Moët Hennessy - Louis Vuitton Société Européenne's Liabilities

We can see from the most recent balance sheet that LVMH Moët Hennessy - Louis Vuitton Société Européenne had liabilities of €33.1b falling due within a year, and liabilities of €47.8b due beyond that. On the other hand, it had cash of €11.3b and €7.94b worth of receivables due within a year. So it has liabilities totalling €61.8b more than its cash and near-term receivables, combined.

Since publicly traded LVMH Moët Hennessy - Louis Vuitton Société Européenne shares are worth a very impressive total of €365.7b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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's net debt is only 0.43 times its EBITDA. And its EBIT covers its interest expense a whopping 30.2 times over. So we're pretty relaxed about its super-conservative use of debt. Fortunately, LVMH Moët Hennessy - Louis Vuitton Société Européenne grew its EBIT by 8.5% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LVMH Moët Hennessy - Louis Vuitton Société Européenne's ability to maintain a healthy balance sheet going forward. 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, 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

The good news is that LVMH Moët Hennessy - Louis Vuitton Société Européenne's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Taking all this data into account, it seems to us that LVMH Moët Hennessy - Louis Vuitton Société Européenne takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for LVMH Moët Hennessy - Louis Vuitton Société Européenne that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.