Ralph Lauren (NYSE:RL) 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.' 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 note that Ralph Lauren Corporation (NYSE:RL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Ralph Lauren Carry?

The chart below, which you can click on for greater detail, shows that Ralph Lauren had US$1.14b in debt in December 2024; about the same as the year before. However, it does have US$2.14b in cash offsetting this, leading to net cash of US$1.00b.

How Healthy Is Ralph Lauren's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ralph Lauren had liabilities of US$2.22b due within 12 months and liabilities of US$2.32b due beyond that. Offsetting these obligations, it had cash of US$2.14b as well as receivables valued at US$578.5m due within 12 months. So it has liabilities totalling US$1.82b more than its cash and near-term receivables, combined.

Of course, Ralph Lauren has a titanic market capitalization of US$13.9b, so these liabilities are probably manageable. 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, Ralph Lauren also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Ralph Lauren

On top of that, Ralph Lauren grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ralph Lauren's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ralph Lauren 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. During the last three years, Ralph Lauren 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

Although Ralph Lauren's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.00b. And it impressed us with free cash flow of US$1.1b, being 87% of its EBIT. So is Ralph Lauren's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Ralph Lauren that you should be aware of before investing here.

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.