These 4 Measures Indicate That La Française des Jeux Société anonyme (EPA:FDJ) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

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. However, it does have €600.6m in cash offsetting this, leading to net cash of €155.1m.

How Strong 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 €1.49b due within a year, and liabilities of €516.5m falling due after 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 €7.22b, 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. 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.

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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 puts it in a very strong position to pay down debt.

Summing Up

While La Française des Jeux Société anonyme does have more liabilities than liquid assets, it also has net cash of €155.1m. And it impressed us with free cash flow of €426m, being 88% 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for La Française des Jeux Société anonyme you should know about.

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.

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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.