Stock Analysis

Is Savills (LON:SVS) A Risky Investment?

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LSE:SVS
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Savills plc (LON:SVS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Savills

What Is Savills's Net Debt?

As you can see below, at the end of June 2021, Savills had UK£374.8m of debt, up from UK£226.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds UK£481.5m in cash, so it actually has UK£106.7m net cash.

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LSE:SVS Debt to Equity History September 18th 2021

A Look At Savills' Liabilities

Zooming in on the latest balance sheet data, we can see that Savills had liabilities of UK£821.2m due within 12 months and liabilities of UK£437.2m due beyond that. Offsetting these obligations, it had cash of UK£481.5m as well as receivables valued at UK£456.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£320.9m.

Given Savills has a market capitalization of UK£1.92b, 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, Savills boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Savills has increased its EBIT by 3.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Savills can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Savills 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. Happily for any shareholders, Savills actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Savills's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£106.7m. And it impressed us with free cash flow of UK£256m, being 129% of its EBIT. So is Savills's debt a risk? It doesn't seem so to us. 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 Savills , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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