Yahoo Finance Is Salvatore Ferragamo (BIT:SFER) Using Too Much Debt?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Salvatore Ferragamo S.p.A. (BIT:SFER) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
See our latest analysis for Salvatore Ferragamo
What Is Salvatore Ferragamo's Net Debt?
As you can see below, at the end of March 2020, Salvatore Ferragamo had €68.1m of debt, up from €38.5m a year ago. Click the image for more detail. However, it does have €190.7m in cash offsetting this, leading to net cash of €122.7m.
How Strong Is Salvatore Ferragamo's Balance Sheet?
We can see from the most recent balance sheet that Salvatore Ferragamo had liabilities of €399.7m falling due within a year, and liabilities of €583.3m due beyond that. Offsetting this, it had €190.7m in cash and €112.7m in receivables that were due within 12 months. So its liabilities total €679.6m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Salvatore Ferragamo is worth €1.86b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Salvatore Ferragamo boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, Salvatore Ferragamo's EBIT fell a jaw-dropping 40% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Salvatore Ferragamo'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Salvatore Ferragamo 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. During the last three years, Salvatore Ferragamo generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
Although Salvatore Ferragamo's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €122.7m. And it impressed us with free cash flow of €125m, being 95% of its EBIT. So we are not troubled with Salvatore Ferragamo's debt use. 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. For example, we've discovered 3 warning signs for Salvatore Ferragamo that you should be aware of before investing here.
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.
