LVMH Moët Hennessy - Louis Vuitton Société Européenne (EPA:MC) Has A Pretty 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at 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?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 LVMH Moët Hennessy - Louis Vuitton Société Européenne had €22.9b of debt, an increase on €21.7b, over one year. However, it does have €10.4b in cash offsetting this, leading to net debt of about €12.5b.

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

Zooming in on the latest balance sheet data, we can see that LVMH Moët Hennessy - Louis Vuitton Société Européenne had liabilities of €34.3b due within 12 months and liabilities of €45.6b due beyond that. On the other hand, it had cash of €10.4b and €7.09b worth of receivables due within a year. So its liabilities total €62.5b more than the combination of its cash and short-term receivables.

Since publicly traded LVMH Moët Hennessy - Louis Vuitton Société Européenne shares are worth a very impressive total of €336.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

LVMH Moët Hennessy - Louis Vuitton Société Européenne has a low net debt to EBITDA ratio of only 0.50. And its EBIT easily covers its interest expense, being 46.2 times the size. So we're pretty relaxed about its super-conservative use of debt. Also good is that LVMH Moët Hennessy - Louis Vuitton Société Européenne grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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, 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. Over the most recent three years, LVMH Moët Hennessy - Louis Vuitton Société Européenne recorded free cash flow worth 72% 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

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 conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think LVMH Moët Hennessy - Louis Vuitton Société Européenne's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of LVMH Moët Hennessy - Louis Vuitton Société Européenne's earnings per share history for free.

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.