Is LVMH Moët Hennessy - Louis Vuitton Société Européenne (EPA:MC) Using Too Much Debt?

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. We can see that LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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, LVMH Moët Hennessy - Louis Vuitton Société Européenne had €19.9b of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of €10.9b, its net debt is less, at about €9.03b.

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

The latest balance sheet data shows that LVMH Moët Hennessy - Louis Vuitton Société Européenne had liabilities of €31.5b due within a year, and liabilities of €46.5b falling due after that. On the other hand, it had cash of €10.9b and €7.11b worth of receivables due within a year. So it has liabilities totalling €60.0b more than its cash and near-term receivables, combined.

Given LVMH Moët Hennessy - Louis Vuitton Société Européenne has a humongous market capitalization of €423.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change 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 0.38 times its EBITDA. And its EBIT easily covers its interest expense, being 80.5 times the size. So we're pretty relaxed about its super-conservative use of debt. Also positive, LVMH Moët Hennessy - Louis Vuitton Société Européenne grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 most recent three years, LVMH Moët Hennessy - Louis Vuitton Société Européenne recorded free cash flow worth 79% 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

LVMH Moët Hennessy - Louis Vuitton Société Européenne's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Considering this range of factors, it seems to us that LVMH Moët Hennessy - Louis Vuitton Société Européenne is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. 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.

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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.