Moncler (BIT:MONC) Seems To Use Debt Rather Sparingly

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. As with many other companies Moncler S.p.A. (BIT:MONC) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Moncler

What Is Moncler's Debt?

As you can see below, Moncler had €43.3m of debt at December 2023, down from €75.3m a year prior. However, it does have €998.8m in cash offsetting this, leading to net cash of €955.5m.

How Healthy Is Moncler's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Moncler had liabilities of €1.01b due within 12 months and liabilities of €767.2m due beyond that. Offsetting this, it had €998.8m in cash and €360.9m in receivables that were due within 12 months. So it has liabilities totalling €417.9m more than its cash and near-term receivables, combined.

Of course, Moncler has a titanic market capitalization of €16.7b, 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. Despite its noteworthy liabilities, Moncler boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Moncler grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Moncler 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. Moncler 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. During the last three years, Moncler generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Moncler's liabilities, but we can be reassured by the fact it has has net cash of €955.5m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in €738m. So we don't think Moncler's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Moncler, you may well want to click here to check an interactive graph of its earnings per share history.

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.