Here's Why Havas (AMS:HAVAS) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. We can see that Havas N.V. (AMS:HAVAS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Havas

What Is Havas's Net Debt?

As you can see below, at the end of December 2024, Havas had €23.0m of debt, up from €7.00m a year ago. Click the image for more detail. But on the other hand it also has €234.0m in cash, leading to a €211.0m net cash position.

How Healthy Is Havas' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Havas had liabilities of €4.12b due within 12 months and liabilities of €650.0m due beyond that. On the other hand, it had cash of €234.0m and €3.13b worth of receivables due within a year. So its liabilities total €1.40b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €1.44b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Havas boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Havas has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. 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 Havas 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Havas 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, Havas recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Havas's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €211.0m. And it impressed us with free cash flow of €223m, being 89% of its EBIT. So we don't have any problem with Havas's use of debt. There's no doubt that we learn most about debt from the balance sheet. 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 Havas .

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.