Hermès International Société en commandite par actions (EPA:RMS) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Hermès International Société en commandite par actions (EPA:RMS) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

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

You can click the graphic below for the historical numbers, but it shows that Hermès International Société en commandite par actions had €45.8m of debt in June 2020, down from €54.4m, one year before. However, it does have €3.75b in cash offsetting this, leading to net cash of €3.70b.

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

We can see from the most recent balance sheet that Hermès International Société en commandite par actions had liabilities of €1.70b falling due within a year, and liabilities of €1.69b due beyond that. Offsetting these obligations, it had cash of €3.75b as well as receivables valued at €235.6m due within 12 months. So it can boast €592.9m more liquid assets than total liabilities.

Having regard to Hermès International Société en commandite par actions's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €87.4b company is struggling for cash, we still think it's worth monitoring its 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 fact Hermès International Société en commandite par actions's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hermès International Société en commandite par actions can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hermès International Société en commandite par actions may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hermès International Société en commandite par actions produced sturdy free cash flow equating to 68% 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 €3.70b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in €1.0b. So we are not troubled with Hermès International Société en commandite par actions's debt use. 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.

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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