Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Saga Furs Oyj (HEL:SAGCV) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Saga Furs Oyj
How Much Debt Does Saga Furs Oyj Carry?
As you can see below, Saga Furs Oyj had €9.22m of debt at October 2021, down from €76.5m a year prior. However, its balance sheet shows it holds €44.0m in cash, so it actually has €34.7m net cash.
How Strong Is Saga Furs Oyj's Balance Sheet?
The latest balance sheet data shows that Saga Furs Oyj had liabilities of €32.1m due within a year, and liabilities of €8.15m falling due after that. Offsetting these obligations, it had cash of €44.0m as well as receivables valued at €34.1m due within 12 months. So it actually has €37.9m more liquid assets than total liabilities.
This luscious liquidity implies that Saga Furs Oyj's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Saga Furs Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Saga Furs Oyj turned things around in the last 12 months, delivering and EBIT of €11m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Saga Furs Oyj's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Saga Furs Oyj 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 last year, Saga Furs Oyj actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Saga Furs Oyj has net cash of €34.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 1,049% of that EBIT to free cash flow, bringing in €115m. So is Saga Furs Oyj's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Saga Furs Oyj .
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.
About HLSE:SAGCV
Excellent balance sheet and good value.
