Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Ralph Lauren Corporation (NYSE:RL) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ralph Lauren's Net Debt?
As you can see below, Ralph Lauren had US$1.14b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.69b in cash offsetting this, leading to net cash of US$548.2m.
How Healthy Is Ralph Lauren's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ralph Lauren had liabilities of US$2.09b due within 12 months and liabilities of US$2.27b due beyond that. On the other hand, it had cash of US$1.69b and US$643.7m worth of receivables due within a year. So it has liabilities totalling US$2.02b more than its cash and near-term receivables, combined.
Given Ralph Lauren has a humongous market capitalization of US$13.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Ralph Lauren boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Ralph Lauren has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ralph Lauren'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ralph Lauren has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Ralph Lauren recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
Although Ralph Lauren's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$548.2m. And we liked the look of last year's 52% year-on-year EBIT growth. So we don't think Ralph Lauren's use of debt is risky. 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. We've identified 2 warning signs with Ralph Lauren , and understanding them should be part of your investment process.
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.
