Is Sano Bruno's Enterprises (TLV:SANO1) A Risky Investment?

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.' 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. Importantly, Sano Bruno's Enterprises Ltd (TLV:SANO1) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Sano Bruno's Enterprises had ₪155.7m of debt, an increase on ₪125.8m, over one year. However, its balance sheet shows it holds ₪544.0m in cash, so it actually has ₪388.3m net cash.

How Strong 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 ₪362.5m due within 12 months and liabilities of ₪55.9m due beyond that. On the other hand, it had cash of ₪544.0m and ₪437.0m worth of receivables due within a year. So it actually has ₪562.6m 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Sano Bruno's Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sano Bruno's Enterprises grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sano Bruno's Enterprises's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 70% 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 we empathize with investors who find debt concerning, you should keep in mind that Sano Bruno's Enterprises has net cash of ₪388.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 37% over the last year. So is Sano Bruno's Enterprises's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Sano Bruno's Enterprises 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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This article by Simply Wall St is general in nature. 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.
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