Does La Française des Jeux Société anonyme (EPA:FDJ) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that La Française des Jeux Société anonyme (EPA:FDJ) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

Check out our latest analysis for La Française des Jeux Société anonyme

What Is La Française des Jeux Société anonyme's Debt?

The image below, which you can click on for greater detail, shows that La Française des Jeux Société anonyme had debt of €489.9m at the end of December 2021, a reduction from €519.1m over a year. But on the other hand it also has €694.9m in cash, leading to a €205.0m net cash position.

How Strong Is La Française des Jeux Société anonyme's Balance Sheet?

We can see from the most recent balance sheet that La Française des Jeux Société anonyme had liabilities of €1.79b falling due within a year, and liabilities of €567.4m due beyond that. Offsetting this, it had €694.9m in cash and €611.2m in receivables that were due within 12 months. So it has liabilities totalling €1.05b more than its cash and near-term receivables, combined.

Since publicly traded La Française des Jeux Société anonyme shares are worth a total of €6.40b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, La Française des Jeux Société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, La Française des Jeux Société anonyme grew its EBIT by 21% 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 it is future earnings, more than anything, that will determine La Française des Jeux Société anonyme'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 company can only pay off debt with cold hard cash, not accounting profits. La Française des Jeux Société anonyme 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 last three years, La Française des Jeux Société anonyme recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although La Française des Jeux Société anonyme's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €205.0m. And it impressed us with free cash flow of €527m, being 93% of its EBIT. So is La Française des Jeux Société anonyme's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for La Française des Jeux Société anonyme you should be aware of.

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.