Stock Analysis

Savills (LON:SVS) Seems To Use Debt Rather Sparingly

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Savills

How Much Debt Does Savills Carry?

The image below, which you can click on for greater detail, shows that Savills had debt of UK£349.0m at the end of December 2021, a reduction from UK£369.7m over a year. But it also has UK£689.7m in cash to offset that, meaning it has UK£340.7m net cash.

LSE:SVS Debt to Equity History May 4th 2022

How Healthy Is Savills' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Savills had liabilities of UK£1.04b due within 12 months and liabilities of UK£449.5m due beyond that. Offsetting this, it had UK£689.7m in cash and UK£572.3m in receivables that were due within 12 months. So its liabilities total UK£232.0m more than the combination of its cash and short-term receivables.

Since publicly traded Savills shares are worth a total of UK£1.46b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Savills boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Savills grew its EBIT by 149% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Savills'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 generation warms our hearts like a puppy in a bumblebee suit.

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£340.7m. And it impressed us with free cash flow of UK£278m, being 138% of its EBIT. So we don't think Savills's use of debt is risky. 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 Savills has 4 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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