Yahoo Finance Is Saras (BIT:SRS) Using Too Much Debt?
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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Saras S.p.A. (BIT:SRS) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Saras
What Is Saras's Debt?
You can click the graphic below for the historical numbers, but it shows that Saras had €310.2m of debt in December 2019, down from €335.7m, one year before. However, its balance sheet shows it holds €483.4m in cash, so it actually has €173.2m net cash.
How Healthy Is Saras's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Saras had liabilities of €2.02b due within 12 months and liabilities of €489.4m due beyond that. Offsetting these obligations, it had cash of €483.4m as well as receivables valued at €435.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.59b.
The deficiency here weighs heavily on the €785.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Saras would likely require a major re-capitalisation if it had to pay its creditors today. Saras boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Importantly, Saras's EBIT fell a jaw-dropping 73% 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 Saras'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Saras may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Saras's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While Saras does have more liabilities than liquid assets, it also has net cash of €173.2m. However, we do find both Saras's level of total liabilities and its EBIT growth rate troubling. So despite the cash, we do think it carries some risks. 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. Case in point: We've spotted 3 warning signs for Saras you should be aware of, and 1 of them can't be ignored.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
