Is SergeFerrari Group (EPA:SEFER) Using Too Much Debt?

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. Importantly, SergeFerrari Group SA (EPA:SEFER) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SergeFerrari Group

What Is SergeFerrari Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 SergeFerrari Group had €143.8m of debt, an increase on €117.7m, over one year. However, it does have €27.3m in cash offsetting this, leading to net debt of about €116.5m.

How Strong Is SergeFerrari Group's Balance Sheet?

We can see from the most recent balance sheet that SergeFerrari Group had liabilities of €114.8m falling due within a year, and liabilities of €120.1m due beyond that. Offsetting this, it had €27.3m in cash and €59.0m in receivables that were due within 12 months. So its liabilities total €148.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €72.9m 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 definitely think shareholders need to watch this one closely. At the end of the day, SergeFerrari Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SergeFerrari Group'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.

Over 12 months, SergeFerrari Group made a loss at the EBIT level, and saw its revenue drop to €314m, which is a fall of 8.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months SergeFerrari Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €1.6m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €9.2m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 SergeFerrari Group , 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.