Here's Why La Française des Jeux Société anonyme (EPA:FDJ) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, La Française des Jeux Société anonyme (EPA:FDJ) does carry debt. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 €415.8m at the end of June 2023, a reduction from €445.5m over a year. But on the other hand it also has €786.7m in cash, leading to a €370.9m net cash position.

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

The latest balance sheet data shows that La Française des Jeux Société anonyme had liabilities of €1.60b due within a year, and liabilities of €499.4m falling due after that. On the other hand, it had cash of €786.7m and €329.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €988.1m.

Since publicly traded La Française des Jeux Société anonyme shares are worth a total of €6.39b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, La Française des Jeux Société anonyme also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that La Française des Jeux Société anonyme has increased its EBIT by 3.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, La Française des Jeux Société anonyme actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While La Française des Jeux Société anonyme does have more liabilities than liquid assets, it also has net cash of €370.9m. And it impressed us with free cash flow of €372m, being 112% of its EBIT. So is La Française des Jeux Société anonyme's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with La Française des Jeux Société anonyme , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.