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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. 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?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

How Much Debt Does LVMH Moët Hennessy - Louis Vuitton Société Européenne Carry?

The chart below, which you can click on for greater detail, shows that LVMH Moët Hennessy - Louis Vuitton Société Européenne had €23.4b in debt in June 2024; about the same as the year before. However, it does have €11.1b in cash offsetting this, leading to net debt of about €12.3b.

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

We can see from the most recent balance sheet that LVMH Moët Hennessy - Louis Vuitton Société Européenne had liabilities of €32.5b falling due within a year, and liabilities of €45.4b due beyond that. On the other hand, it had cash of €11.1b and €7.97b worth of receivables due within a year. So its liabilities total €58.9b more than the combination of its cash and short-term receivables.

Given LVMH Moët Hennessy - Louis Vuitton Société Européenne has a humongous market capitalization of €314.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

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's net debt is only 0.51 times its EBITDA. And its EBIT covers its interest expense a whopping 24.3 times over. So we're pretty relaxed about its super-conservative use of debt. But the other side of the story is that LVMH Moët Hennessy - Louis Vuitton Société Européenne saw its EBIT decline by 2.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. 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 we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, LVMH Moët Hennessy - Louis Vuitton Société Européenne produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. 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. But, on a more sombre note, we are a little concerned by its EBIT growth rate. Looking at all the aforementioned factors together, it strikes us that LVMH Moët Hennessy - Louis Vuitton Société Européenne can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. Over time, share prices tend to follow earnings per share, so if you're interested in LVMH Moët Hennessy - Louis Vuitton Société Européenne, you may well want to click here to check an interactive graph of its earnings per share history.

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.