These 4 Measures Indicate That Hermès International Société en commandite par actions (EPA:RMS) Is Using Debt Safely

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. Importantly, Hermès International Société en commandite par actions (EPA:RMS) does carry debt. But the more important question is: how much risk is that debt creating?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its 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?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Hermès International Société en commandite par actions had €58.0m of debt, an increase on €38.0m, over one year. However, its balance sheet shows it holds €9.35b in cash, so it actually has €9.29b net cash.

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

We can see from the most recent balance sheet that Hermès International Société en commandite par actions had liabilities of €2.99b falling due within a year, and liabilities of €2.02b due beyond that. Offsetting this, it had €9.35b in cash and €431.0m in receivables that were due within 12 months. So it actually has €4.77b 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. 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.

Also positive, Hermès International Société en commandite par actions grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. 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 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. 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. Over the most recent three years, Hermès International Société en commandite par actions recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 €9.29b, as well as more liquid assets than liabilities. And we liked the look of last year's 29% 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.

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.