Is Sano Bruno's Enterprises (TLV:SANO1) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Sano Bruno's Enterprises Ltd (TLV:SANO1) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sano Bruno's Enterprises

How Much Debt Does Sano Bruno's Enterprises Carry?

The chart below, which you can click on for greater detail, shows that Sano Bruno's Enterprises had ₪14.2m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds ₪541.8m in cash, so it actually has ₪527.6m net cash.

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

We can see from the most recent balance sheet that Sano Bruno's Enterprises had liabilities of ₪362.5m falling due within a year, and liabilities of ₪44.9m due beyond that. Offsetting these obligations, it had cash of ₪541.8m as well as receivables valued at ₪510.8m due within 12 months. So it actually has ₪645.2m more liquid assets than total liabilities.

It's good to see that Sano Bruno's Enterprises has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues 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.

On top of that, Sano Bruno's Enterprises grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Sano Bruno's Enterprises recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Sano Bruno's Enterprises has ₪527.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 34% year-on-year EBIT growth. So we don't think Sano Bruno's Enterprises'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 - Sano Bruno's Enterprises has 1 warning sign we think you should be aware of.

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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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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