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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hermès International Société en commandite par actions (EPA:RMS) does carry debt. But the real question is whether this debt is making the company risky.

We check all companies for important risks. See what we found for Hermès International Société en commandite par actions in our free report.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

As you can see below, at the end of December 2024, Hermès International Société en commandite par actions had €61.0m of debt, up from €51.0m a year ago. Click the image for more detail. But it also has €11.6b in cash to offset that, meaning it has €11.6b net cash.

A Look At Hermès International Société en commandite par actions' Liabilities

According to the last reported balance sheet, Hermès International Société en commandite par actions had liabilities of €3.63b due within 12 months, and liabilities of €2.12b due beyond 12 months. On the other hand, it had cash of €11.6b and €506.0m worth of receivables due within a year. So it actually has €6.40b more liquid assets than total liabilities.

This short term liquidity is a sign that Hermès International Société en commandite par actions could probably pay off its debt with ease, as its balance sheet is far from stretched. 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!

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

Fortunately, Hermès International Société en commandite par actions grew its EBIT by 8.3% in the last year, making that debt load look even more manageable. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 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 €11.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in €4.1b. So we don't think Hermès International Société en commandite par actions's use of debt is risky. 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.

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.