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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Sano Bruno's Enterprises Ltd (TLV:SANO1) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sano Bruno's Enterprises

How Much Debt Does Sano Bruno's Enterprises Carry?

As you can see below, at the end of December 2022, Sano Bruno's Enterprises had ₪150.8m of debt, up from ₪126.1m a year ago. Click the image for more detail. However, it does have ₪623.0m in cash offsetting this, leading to net cash of ₪472.3m.

A Look At Sano Bruno's Enterprises' Liabilities

We can see from the most recent balance sheet that Sano Bruno's Enterprises had liabilities of ₪385.6m falling due within a year, and liabilities of ₪55.1m due beyond that. On the other hand, it had cash of ₪623.0m and ₪537.9m worth of receivables due within a year. So it actually has ₪720.3m 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. Because it has plenty of assets, it is unlikely to have trouble 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!

It is just as well that Sano Bruno's Enterprises's load is not too heavy, because its EBIT was down 29% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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. While Sano Bruno's Enterprises has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Sano Bruno's Enterprises recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 ₪472.3m in net cash and a decent-looking balance sheet. So we don't have any problem with Sano Bruno's Enterprises's use of debt. 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. For example - Sano Bruno's Enterprises has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.