Sano Bruno's Enterprises (TLV:SANO1) Could Easily Take On More 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. We can see that Sano Bruno's Enterprises Ltd (TLV:SANO1) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its 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 ₪13.2m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₪590.5m in cash, so it actually has ₪577.3m 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 ₪362.2m due within 12 months and liabilities of ₪51.2m due beyond that. Offsetting these obligations, it had cash of ₪590.5m as well as receivables valued at ₪496.2m due within 12 months. So it can boast ₪673.3m more liquid assets than total liabilities.

This excess liquidity suggests that Sano Bruno's Enterprises is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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!

Also good is that Sano Bruno's Enterprises grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sano Bruno's Enterprises will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Sano Bruno's Enterprises produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. 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 ₪577.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in ₪230m. So we don't think Sano Bruno's Enterprises's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Sano Bruno's Enterprises, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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