Christian Dior (EPA:CDI) has a rock-solid balance sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Christian Dior SE (EPA:CDI) uses debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Christian Dior
What is Christian Dior’s net debt?
You can click on the chart below for historical figures, but it shows Christian Dior had €20.3 billion in debt in December 2021, up from €25.1 billion a year earlier. However, he has €10.7 billion in cash to offset this, resulting in a net debt of around €9.59 billion.
How strong is Christian Dior’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Christian Dior had liabilities of €28.0 billion maturing within 12 months and liabilities of €48.0 billion maturing beyond. In compensation for these obligations, it had cash of 10.7 billion euros as well as receivables worth 6.11 billion euros at less than 12 months. Thus, its liabilities total 59.2 billion euros more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not that bad since Christian Dior has a huge market cap of €109.3 billion, so he could probably bolster his balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Christian Dior has a low net debt to EBITDA ratio of just 0.50. And its EBIT easily covers its interest charges, which is 89.1 times the size. So we’re pretty relaxed about his super-conservative use of debt. Even more impressive is the fact that Christian Dior increased its EBIT by 112% over twelve months. If sustained, this growth will make debt even more manageable in years to come. There is no doubt that we learn the most about debt from the balance sheet. But it is the results of Christian Dior that will influence the holding of the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Christian Dior has generated free cash flow of a very strong 90% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
Our point of view
Christian Dior’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But truth be told, we think his total passive level undermines that impression a bit. Zooming out, Christian Dior seems to be using debt quite sensibly; and that gets the green light from us. Although debt carries risks, when used wisely, it can also generate a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 1 warning sign for Christian Dior of which you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.