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

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.' 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. We can see that La Française des Jeux Société anonyme (EPA:FDJ) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See 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 La Française des Jeux Société anonyme had €415.8m of debt in June 2023, down from €445.5m, one year before. But on the other hand it also has €786.7m in cash, leading to a €370.9m net cash position.

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

According to the last reported balance sheet, La Française des Jeux Société anonyme had liabilities of €1.60b due within 12 months, and liabilities of €499.4m due beyond 12 months. On the other hand, it had cash of €786.7m and €329.2m worth of receivables due within a year. So its liabilities total €988.1m more than the combination of its cash and short-term receivables.

Since publicly traded La Française des Jeux Société anonyme shares are worth a total of €6.36b, 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.

Fortunately, La Française des Jeux Société anonyme grew its EBIT by 3.0% in the last year, making that debt load look even more manageable. 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. Happily for any shareholders, La Française des Jeux Société anonyme actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While La Française des Jeux Société anonyme does have more liabilities than liquid assets, it also has net cash of €370.9m. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in €372m. So we don't think La Française des Jeux Société anonyme's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with La Française des Jeux Société anonyme .

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.