Hermès International Société en commandite par actions (EPA:RMS) Has A Rock Solid Balance Sheet

By
Simply Wall St
Published
September 26, 2021
ENXTPA:RMS
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hermès International Société en commandite par actions (EPA:RMS) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hermès International Société en commandite par actions

What Is Hermès International Société en commandite par actions's Net Debt?

As you can see below, Hermès International Société en commandite par actions had €43.4m of debt at June 2021, down from €45.8m a year prior. However, it does have €5.35b in cash offsetting this, leading to net cash of €5.31b.

debt-equity-history-analysis
ENXTPA:RMS Debt to Equity History September 27th 2021

How Strong Is Hermès International Société en commandite par actions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hermès International Société en commandite par actions had liabilities of €2.07b due within 12 months and liabilities of €1.78b due beyond that. Offsetting this, it had €5.35b in cash and €309.2m in receivables that were due within 12 months. So it actually has €1.81b more liquid assets than total liabilities.

Having regard to Hermès International Société en commandite par actions' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €134.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Hermès International Société en commandite par actions boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Hermès International Société en commandite par actions has boosted its EBIT by 88%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hermès International Société en commandite par actions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hermès International Société en commandite par actions has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Hermès International Société en commandite par actions produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Hermès International Société en commandite par actions has €5.31b in net cash and a decent-looking balance sheet. And we liked the look of last year's 88% year-on-year EBIT growth. So is Hermès International Société en commandite par actions's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Hermès International Société en commandite par actions, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.