La Française des Jeux Société anonyme (EPA:FDJ) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies La Française des Jeux Société anonyme (EPA:FDJ) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for La Française des Jeux Société anonyme

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

As you can see below, La Française des Jeux Société anonyme had €445.5m of debt at June 2022, down from €507.4m a year prior. But on the other hand it also has €600.6m in cash, leading to a €155.1m net cash position.

A Look At La Française des Jeux Société anonyme's Liabilities

Zooming in on the latest balance sheet data, we can see that La Française des Jeux Société anonyme had liabilities of €1.49b due within 12 months and liabilities of €516.5m due beyond that. On the other hand, it had cash of €600.6m and €258.4m worth of receivables due within a year. So it has liabilities totalling €1.14b more than its cash and near-term receivables, combined.

Of course, La Française des Jeux Société anonyme has a market capitalization of €6.06b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

And we also note warmly that La Française des Jeux Société anonyme grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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. Over the last three years, La Française des Jeux Société anonyme recorded free cash flow worth a fulsome 88% 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 €155.1m. And it impressed us with free cash flow of €426m, being 88% of its EBIT. So we don't think La Française des Jeux Société anonyme's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for La Française des Jeux Société anonyme that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.