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 Compagnie Financière Richemont SA (VTX:CFR) makes use of debt. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Compagnie Financière Richemont
How Much Debt Does Compagnie Financière Richemont Carry?
As you can see below, Compagnie Financière Richemont had €7.03b of debt at March 2019, down from €8.19b a year prior. However, its balance sheet shows it holds €9.59b in cash, so it actually has €2.56b net cash.
How Strong Is Compagnie Financière Richemont's Balance Sheet?
According to the last reported balance sheet, Compagnie Financière Richemont had liabilities of €6.30b due within 12 months, and liabilities of €4.70b due beyond 12 months. Offsetting these obligations, it had cash of €9.59b as well as receivables valued at €1.04b due within 12 months. So it has liabilities totalling €376.0m more than its cash and near-term receivables, combined.
Having regard to Compagnie Financière Richemont's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €39.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Compagnie Financière Richemont also has more cash than debt, so we're pretty confident it can manage its debt safely.
Fortunately, Compagnie Financière Richemont grew its EBIT by 3.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Compagnie Financière Richemont'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.