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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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Chocoladefabriken Lindt & Sprüngli
What Is Chocoladefabriken Lindt & Sprüngli's Debt?
As you can see below, Chocoladefabriken Lindt & Sprüngli had CHF1.01b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had CHF727.4m in cash, and so its net debt is CHF281.0m.
A Look At Chocoladefabriken Lindt & Sprüngli's Liabilities
The latest balance sheet data shows that Chocoladefabriken Lindt & Sprüngli had liabilities of CHF837.0m due within a year, and liabilities of CHF2.23b falling due after that. Offsetting this, it had CHF727.4m in cash and CHF553.1m in receivables that were due within 12 months. So its liabilities total CHF1.79b more than the combination of its cash and short-term receivables.
Since publicly traded Chocoladefabriken Lindt & Sprüngli shares are worth a very impressive total of CHF18.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.