Is Hermès International Société en commandite par actions (EPA:RMS) Using Too Much Debt?

Simply Wall St

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Hermès International Société en commandite par actions (EPA:RMS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hermès International Société en commandite par actions

What Is Hermès International Société en commandite par actions's Debt?

The chart below, which you can click on for greater detail, shows that Hermès International Société en commandite par actions had €50.1m in debt in December 2019; about the same as the year before. But it also has €4.38b in cash to offset that, meaning it has €4.33b net cash.

ENXTPA:RMS Historical Debt May 29th 2020

How Healthy Is Hermès International Société en commandite par actions's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hermès International Société en commandite par actions had liabilities of €2.02b due within 12 months and liabilities of €1.28b due beyond that. Offsetting this, it had €4.38b in cash and €537.2m in receivables that were due within 12 months. So it actually has €1.62b more liquid assets than total liabilities.

This short term liquidity is a sign that Hermès International Société en commandite par actions could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hermès International Société en commandite par actions boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Hermès International Société en commandite par actions grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hermès International Société en commandite par actions 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hermès International Société en commandite par actions 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. Over the most recent three years, Hermès International Société en commandite par actions recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Hermès International Société en commandite par actions has €4.33b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in €1.6b. So is Hermès International Société en commandite par actions'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Hermès International Société en commandite par actions has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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. Thank you for reading.