Health Check: How Prudently Does Samsonite International (HKG:1910) Use Debt?

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.' 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. We note that Samsonite International S.A. (HKG:1910) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Samsonite International

What Is Samsonite International's Debt?

The image below, which you can click on for greater detail, shows that Samsonite International had debt of US$2.81b at the end of September 2021, a reduction from US$3.21b over a year. However, it also had US$1.15b in cash, and so its net debt is US$1.66b.

How Strong Is Samsonite International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samsonite International had liabilities of US$795.4m due within 12 months and liabilities of US$3.26b due beyond that. Offsetting these obligations, it had cash of US$1.15b as well as receivables valued at US$179.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.72b.

This is a mountain of leverage relative to its market capitalization of US$3.01b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Samsonite International'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, Samsonite International made a loss at the EBIT level, and saw its revenue drop to US$1.8b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Samsonite International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$62m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$341m into a profit. In the meantime, we consider the stock very risky. For riskier companies like Samsonite International I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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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.