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

Warren Buffett famously said, '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. Importantly, LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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 also had €11.1b in cash, and so its net debt is €12.3b.

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

Zooming in on the latest balance sheet data, we can see that LVMH Moët Hennessy - Louis Vuitton Société Européenne had liabilities of €32.5b due within 12 months 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 outweigh the sum of its cash and (near-term) receivables by €58.9b.

Of course, LVMH Moët Hennessy - Louis Vuitton Société Européenne has a titanic market capitalization of €301.5b, so these liabilities are probably manageable. 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). 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 easily covers its interest expense, being 24.3 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. 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. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 58% 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.

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. 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. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - LVMH Moët Hennessy - Louis Vuitton Société Européenne has 1 warning sign we think you should be aware of.

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.