Does Sano Bruno's Enterprises (TLV:SANO1) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sano Bruno's Enterprises Ltd (TLV:SANO1) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sano Bruno's Enterprises

How Much Debt Does Sano Bruno's Enterprises Carry?

As you can see below, Sano Bruno's Enterprises had ₪12.8m of debt at September 2021, down from ₪14.2m a year prior. But it also has ₪558.6m in cash to offset that, meaning it has ₪545.8m net cash.

How Healthy Is Sano Bruno's Enterprises' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sano Bruno's Enterprises had liabilities of ₪373.1m due within 12 months and liabilities of ₪47.5m due beyond that. On the other hand, it had cash of ₪558.6m and ₪542.0m worth of receivables due within a year. So it actually has ₪679.9m more liquid assets than total liabilities.

This surplus suggests that Sano Bruno's Enterprises is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Sano Bruno's Enterprises has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Sano Bruno's Enterprises has increased its EBIT by 2.6% 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 it is Sano Bruno's Enterprises's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sano Bruno's Enterprises 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. During the last three years, Sano Bruno's Enterprises produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Sano Bruno's Enterprises has ₪545.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₪215m, being 78% of its EBIT. So we don't think Sano Bruno's Enterprises's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Sano Bruno's Enterprises you should be aware of.

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.