Is Hermès International Société en commandite par actions (EPA:RMS) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hermès International Société en commandite par actions (EPA:RMS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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

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

As you can see below, Hermès International Société en commandite par actions had €25.0m of debt at December 2021, down from €43.0m a year prior. However, its balance sheet shows it holds €6.70b in cash, so it actually has €6.67b net cash.

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 €2.58b due within 12 months and liabilities of €1.86b due beyond that. On the other hand, it had cash of €6.70b and €391.0m worth of receivables due within a year. So it can boast €2.65b 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. Simply put, the fact that Hermès International Société en commandite par actions has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Hermès International Société en commandite par actions has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €6.67b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 77% over the last year. So we don't think Hermès International Société en commandite par actions's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Hermès International Société en commandite par actions that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.