Sano Bruno's Enterprises (TLV:SANO1) Has A Pretty 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.' 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. As with many other companies Sano Bruno's Enterprises Ltd (TLV:SANO1) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The image below, which you can click on for greater detail, shows that Sano Bruno's Enterprises had debt of ₪12.5m at the end of June 2022, a reduction from ₪13.2m over a year. But on the other hand it also has ₪611.8m in cash, leading to a ₪599.4m net cash position.

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 ₪424.4m due within 12 months and liabilities of ₪48.9m due beyond that. Offsetting these obligations, it had cash of ₪611.8m as well as receivables valued at ₪565.7m due within 12 months. So it actually has ₪704.3m more liquid assets than total liabilities.

This excess liquidity suggests that Sano Bruno's Enterprises is taking a careful approach to debt. 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!

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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 77% 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 ₪599.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₪135m, being 77% of its EBIT. So is Sano Bruno's Enterprises's debt a risk? It doesn't seem so to us. 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. Be aware that Sano Bruno's Enterprises is showing 1 warning sign in our investment analysis , 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. 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.