The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Moncler S.p.A. (BIT:MONC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Moncler
What Is Moncler's Net Debt?
As you can see below, Moncler had €75.4m of debt at June 2020, down from €96.9m a year prior. But it also has €667.4m in cash to offset that, meaning it has €592.0m net cash.
How Strong Is Moncler's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Moncler had liabilities of €544.5m due within 12 months and liabilities of €623.1m due beyond that. On the other hand, it had cash of €667.4m and €98.3m worth of receivables due within a year. So it has liabilities totalling €401.9m more than its cash and near-term receivables, combined.
Of course, Moncler has a titanic market capitalization of €10.4b, so these liabilities are probably manageable. 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, Moncler also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the bad news is that Moncler has seen its EBIT plunge 18% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Moncler 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Moncler 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. Over the last three years, Moncler 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
While it is always sensible to look at a company's total liabilities, it is very reassuring that Moncler has €592.0m in net cash. And it impressed us with free cash flow of €336m, being 91% of its EBIT. So we don't have any problem with Moncler's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Moncler's earnings per share history for free.
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. 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.
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About BIT:MONC
Moncler
Designs, produces, and distributes clothing and related accessories for men, women, and children under the Moncler and Stone Island brand names in Italy, rest of Europe, Asia, the Middle East, Africa, and the Americas.
Outstanding track record with flawless balance sheet and pays a dividend.