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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hermès International Société en commandite par actions (EPA:RMS) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

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

How Much Debt Does Hermès International Société en commandite par actions Carry?

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.

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

The latest balance sheet data shows that Hermès International Société en commandite par actions had liabilities of €2.07b due within a year, and liabilities of €1.78b falling due after that. On the other hand, it had cash of €5.35b and €309.2m worth of receivables due within a year. So it actually has €1.81b more liquid assets than total liabilities.

This state of affairs indicates that Hermès International Société en commandite par actions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €160.2b 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!

On top of that, Hermès International Société en commandite par actions grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. 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 we empathize with investors who find debt concerning, you should keep in mind that Hermès International Société en commandite par actions has net cash of €5.31b, as well as more liquid assets than liabilities. 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. 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 Hermès International Société en commandite par actions's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.