La Française des Jeux Société anonyme (EPA:FDJ) Could Easily Take On More Debt

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. Importantly, La Française des Jeux Société anonyme (EPA:FDJ) does carry 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

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

How Much Debt Does La Française des Jeux Société anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 La Française des Jeux Société anonyme had €519.1m of debt, an increase on €254.1m, over one year. But on the other hand it also has €888.4m in cash, leading to a €369.3m net cash position.

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

Zooming in on the latest balance sheet data, we can see that La Française des Jeux Société anonyme had liabilities of €1.57b due within 12 months and liabilities of €630.8m due beyond that. On the other hand, it had cash of €888.4m and €464.4m worth of receivables due within a year. So its liabilities total €846.5m more than the combination of its cash and short-term receivables.

Since publicly traded La Française des Jeux Société anonyme shares are worth a very impressive total of €9.02b, 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. 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.

Another good sign is that La Française des Jeux Société anonyme has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if La Française des Jeux Société anonyme 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 La Française des Jeux Société anonyme 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, La Française des Jeux Société anonyme produced sturdy free cash flow equating to 63% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that La Française des Jeux Société anonyme has €369.3m in net cash. And we liked the look of last year's 29% year-on-year EBIT growth. 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. For example - La Française des Jeux Société anonyme has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

When trading La Française des Jeux Société anonyme or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.