LVMH Moët Hennessy - Louis Vuitton Société Européenne (EPA:MC) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is LVMH Moët Hennessy - Louis Vuitton Société Européenne's Net Debt?

As you can see below, at the end of December 2024, LVMH Moët Hennessy - Louis Vuitton Société Européenne had €23.0b of debt, up from €22.0b a year ago. Click the image for more detail. However, because it has a cash reserve of €13.6b, its net debt is less, at about €9.43b.

How Healthy Is LVMH Moët Hennessy - Louis Vuitton Société Européenne's Balance Sheet?

We can see from the most recent balance sheet that LVMH Moët Hennessy - Louis Vuitton Société Européenne had liabilities of €33.7b falling due within a year, and liabilities of €46.2b due beyond that. Offsetting this, it had €13.6b in cash and €8.78b in receivables that were due within 12 months. So its liabilities total €57.5b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since LVMH Moët Hennessy - Louis Vuitton Société Européenne has a huge market capitalization of €235.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

View our latest analysis for LVMH Moët Hennessy - Louis Vuitton Société Européenne

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

LVMH Moët Hennessy - Louis Vuitton Société Européenne's net debt is only 0.42 times its EBITDA. And its EBIT covers its interest expense a whopping 20.7 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, LVMH Moët Hennessy - Louis Vuitton Société Européenne's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 LVMH Moët Hennessy - Louis Vuitton Société Européenne'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, LVMH Moët Hennessy - Louis Vuitton Société Européenne recorded free cash flow worth 58% 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.

Our View

LVMH Moët Hennessy - Louis Vuitton Société Européenne's interest cover was a real positive on this analysis, as was its net debt to EBITDA. But truth be told its EBIT growth rate had us nibbling our nails. When we consider all the elements mentioned above, it seems to us that LVMH Moët Hennessy - Louis Vuitton Société Européenne is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for LVMH Moët Hennessy - Louis Vuitton Société Européenne that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.