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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. As with many other companies. LVMH Moët Hennessy – Louis Vuitton, Société Européenne (EPA:MC) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does LVMH Moët Hennessy – Louis Vuitton Société Européenne Carry?
The image below, which you can click on for greater detail, shows that LVMH Moët Hennessy – Louis Vuitton Société Européenne had debt of €11.1b at the end of December 2018, a reduction from €11.6b over a year. On the flip side, it has €5.29b in cash leading to net debt of about €5.76b.
A Look At LVMH Moët Hennessy – Louis Vuitton Société Européenne’s Liabilities
The latest balance sheet data shows that LVMH Moët Hennessy – Louis Vuitton Société Européenne had liabilities of €16.8b due within a year, and liabilities of €23.5b falling due after that. On the other hand, it had cash of €5.29b and €5.02b worth of receivables due within a year. So it has liabilities totalling €30.0b 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 €192.8b, 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. Because it carries more debt than cash, we think it’s worth watching LVMH Moët Hennessy – Louis Vuitton Société Européenne’s balance sheet over time.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
LVMH Moët Hennessy – Louis Vuitton Société Européenne’s net debt is only 0.49 times its EBITDA. And its EBIT easily covers its interest expense, being 104 times the size. So we’re pretty relaxed about its super-conservative use of debt. Another good sign is that LVMH Moët Hennessy – Louis Vuitton Société Européenne has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There’s no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, LVMH Moët Hennessy – Louis Vuitton Société Européenne recorded free cash flow worth 56% 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.
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 EBIT growth rate 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. 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.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.