Hermès International Société en commandite par actions (EPA:RMS) Has A Rock Solid 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.' 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. We can see that Hermès International Société en commandite par actions (EPA:RMS) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hermès International Société en commandite par actions

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

You can click the graphic below for the historical numbers, but it shows that Hermès International Société en commandite par actions had €50.0m of debt in June 2024, down from €58.0m, one year before. But it also has €9.48b in cash to offset that, meaning it has €9.43b net cash.

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 €3.28b due within a year, and liabilities of €2.15b falling due after that. On the other hand, it had cash of €9.48b and €587.0m worth of receivables due within a year. So it can boast €4.64b more liquid assets than total liabilities.

This surplus suggests that Hermès International Société en commandite par actions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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!

Fortunately, Hermès International Société en commandite par actions grew its EBIT by 9.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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 €9.43b, as well as more liquid assets than liabilities. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in €3.7b. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.