We Think La Française des Jeux Société anonyme (EPA:FDJ) Can Manage Its Debt With Ease

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies La Française des Jeux Société anonyme (EPA:FDJ) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?

As you can see below, La Française des Jeux Société anonyme had €386.0m of debt at June 2024, down from €415.8m a year prior. But on the other hand it also has €770.1m in cash, leading to a €384.1m net cash position.

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

We can see from the most recent balance sheet that La Française des Jeux Société anonyme had liabilities of €1.88b falling due within a year, and liabilities of €526.5m due beyond that. Offsetting these obligations, it had cash of €770.1m as well as receivables valued at €524.1m due within 12 months. So it has liabilities totalling €1.11b more than its cash and near-term receivables, combined.

Since publicly traded La Française des Jeux Société anonyme shares are worth a total of €6.90b, 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. 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!

Also positive, La Française des Jeux Société anonyme grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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 91% 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

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 €384.1m. And it impressed us with free cash flow of €529m, being 91% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. 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.

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.